Thursday, 5 August 2010

More Quantitative Easing on the way?

It seems strange that there is currently such a debate on a subject that most of us know little or nothing about, but Quantitative Easing (QE) is once again a hot topic.

QE has been the process by which the Bank of England has injected more liquid funds into the economy. It started in March 2009 with an initial purchase of £75 Million’s worth of Bonds. This has been gradually extended to the point where £200 Million had been let into the economy in this manner. There has been much controversy about what has actually happened to this money since that point, with many sceptical that it simply sits with Banks because the current rates of interest make it not worth their while risking lending it out.

Whatever, I don’t think it is any coincidence that the beginning of the equity recovery happened to come at the same time as this money began to appear. There has been much talk about money that isn’t worth lending fuelling asset price rises and we certainly haven’t seen massive increases in business lending or indeed mortgage take-up. This led to well founded fears that when the BoE do eventually remove QE, markets would have once more to rely on ‘real money’ alone and we might see an asset price slump.

There is now speculation that the Summer’s Budget and more so the Spending Round due in the Autumn will depress prospects generally, as they both effectively signal less Public Spending and thus less artificial money filtering though. This is leading to calls for more Quantitative Easing here in the UK as in the US, in the hope that this will make up the difference. It is certainly true to say that of the two measures the Bank could take to stimulate things, the one of reducing interest rates (held firm again in today’s announcement from the MPC) is effectively a non-runner, leaving QE as the only chance of a boost.

This might just be my eternal optimism kicking in, but if there is to be more QE in the coming months, we might just see a further boost to the stock market as this money is put to use. The old adage of ‘many a slip twixt cup and lip’ is never truer than here, but I would say that there is a fair likelihood of further stimulus, and until rates rise significantly, which doesn’t look like happening this side of next summer, real and still attractively priced assets are the most logical place for this money to end up.

Watch this space. In a year’s time I shall either be right or very wrong!