The Bank of England has extended its policy of increasing the money supply through the process of quantitative easing. After the May meeting of the MPC, the Bank announced that it will increase the amount of assets it is prepared to buy under the ‘Asset Purchase Programme’ from £75 billion to £125 billion. At the same time the ECB has announced that it too will embark on a programme of quantitative easing. The press releases and articles below consider the details.
Bank of England Maintains Bank Rate at 0.5% and Increases Size of Asset Purchase Programme by £50 Billion to £125 Billion Bank of England News Release (7/5/09) (see also interview with Bank of England Governor)
Press conference by Jean-Claude Trichet, President of the ECB and Lucas Papademos, Vice President of the ECB ECB Press Release (7/5/09) (you can also watch a webcast of the press conference from this link)
Bank of England and European Central Bank extend quantitative easing Telegraph (8/5/09) (see also)
Economy to get extra £50bn boost BBC News (7/5/09)
A QE surprise BBC News: Stephanomics blog (7/5/09)
European Central Bank opts for quantitative easing to lift the eurozone far Times Online (8/5/09)
Fighting recession in the eurozone Financial Times (7/5/09)
ECB dips toe in quantitative easing water Guardian (7/5/09)
Quantitative easing: The story so far BBC News site video
Questions
- Explain how quantitative easing is conducted by the Bank of England and the ECB.
- Examine what determines the effect of quantitative easing on aggregate demand.
- Is quantitative easing the same as open-market operations?
- Explain how quantitative easing is likely to affect exchange rates.
Retail sales in the eurozone have been falling for several months as the recession deepens. The latest figures show a drop in sales of 4.2% between March 2008 and 2009. But what are the implications for fiscal and monetary policy?
With many eurozone countries worried about growing budget deficits the pressure is on the ECB to cut interest rates. Would this help to halt the decline in sales, or do policy-makers need to go further? The linked articles look at the facts and some of the solutions.
Volume of retail trade down by 0.6% in euro area Eurostat news release (6/5/09)
Brussels doubles EU recession forecasts for 2009 Independent (5/5/09)
Euro zone retail sales in record fall IrishTimes.com (24/4/09)
Record decline in eurozone sales BBC News (6/5/09)
EU businesses say worst of crisis over, urge action Guardian (6/5/09)
ECB Is Expected to Cut Rate to 1%, Enlist Other Tools The Wall Street Journal (6/5/09)
ECB set to cut interest rates to record low of 1% Times Online (5/5/09)
See also
Economic Forecast, Spring 2009 European Economy (European Commission)
Questions
- What determines the level of retail sales?
- What would halt the decline in retail sales?
- Discuss various measures that the ECB could take to stimulate the eurozone economy. Why might it be reluctant to take some of the measures?
The G20 countries meet each year. Normally their meetings are full of fine words resulting in little action. But at a summit in London on 2 April 2009, the fear of a deepening global recession focused minds and a package of measures worth over $1 trillion was agreed to stimulate trade and growth. This included $750 billion for the IMF to help economies in severe difficulties, $250 billion for financing world trade and $100 to multilateral development banks (such as the Asian Development Bank) to provide extra aid to the poorest countries.
The extra money for the IMF would include $500 billion of loans from member countries and £250 billion in new money – a form of international quantitative easing. This new money would be in the form of ‘special drawing rights’. These are denominated in dollars and are created by the IMF to be drawn on by countries in difficulties.
There was also agreement to tighten financial regulation and to resist protectionism. A ‘Financial Stability Board’ would be set up and work with the IMF to design a strengthened regulatory system for banks and other financial institutions and for financial markets and instruments.
The following articles look at the agreement and its likely effects.
‘This is the day the world came together to fight back’ Independent (2/4/09)
G20 communiqué: Point by point analysis Telegraph (2/4/09)
G20 summit – leaders’ statement. Full text of the communiqué Guardian (2/4/09)
G20: Economic summit snapshot BBC News Online (2/4/09)
G20 leaders seal $1tn global deal BBC News Online (2/4/09)
G-force The Economist (2/4/09)
World leaders declare war on risk Sydney Morning Herald (3/4/09)
Postscript (Sept 2009)
G20: What progress has been made? BBC News (23/9/09)
G20: Pledge by pledge BBC News (25/9/09)
Questions
- What will determine the success or failure of the G20 agreement to revive the world economy?
- Identify any multiplier effects from the agreed measures.
- Why did the French and German governments object to any further fiscal stimulus packages?
While deflation was quite common right up to World War II, it has not been seen in the UK since 1947. The podcast considers whether it might return and looks at the impact of deflation on economic activity. There is a short case study on the deflationary years suffered by Japan between 1997 and 2006 and a consideration of policies that might be appropriate to overcome defaltionary pressures.
Governments and central banks around the world are trying hard to minimise the impact of the economic downturn on their economies. One means of doing this is to cut interest rates. The aim is to boost aggregate demand by giving people more disposable income and making borrowing and investment cheaper. But how responsive will people be to the interest rate cuts? The articles and podcasts below look at the issues.
Combating the recession The Economist (8/1/09)
Economic downturn: ‘Interest rates may not be such a useful tool any more’ Guardian (9/1/09) Podcast
Beyond rate cuts Financial Times (15/1/09)
Beyond retail therapy Guardian (8/1/09)
Uncharted territory for interest rates BBC News Online (8/1/09)
Latest cut in interest rates will not revive flagging economy Times Online (9/1/09)
Interest rates – the setting of the LIBOR rate BBC Biz Daily (9/1/09) Podcast – Tim Harford
Questions
- Explain the process by which lower interest rates boost aggregate demand.
- Explain what is meant by the LIBOR rate. Listening to the BBC Biz Daily podcast above may help in answering this.
- Assess the importance of the LIBOR rate in determining the levels of borrowing and investment in the economy.
- Discuss the relative effectiveness of fiscal and monetary policy in boosting the level of aggregate demand in the UK economy.
