• The Monetary Policy Committee (MPC) decision both to complete the previously announced £75bn of asset purchases and to extend it by another £50bn underlined both the uncertainties surrounding its effectiveness and the severity of the deflation risk in the UK economy. I think that the MPC may yet have to do even more.
  • It's hardly as if the quantitative easing (QE) undertaken so far has been a resounding success. The fall in bond yields seen after QE was initially announced has now been largely reversed. 10 year gilt yields are now higher. And even though corporate bond spreads have narrowed a touch, corporate bond yields have also reversed most of their previous falls.
  • Of course, without QE, yields could have risen even further. And corporate bond issuance has remained robust (albeit in line with its trend pre-QE). However, if the Committee is relying at all on lower gilt yields to simulate the economy, it is clear that the action taken so far has not been sufficient.
  • Meanwhile, it is still early days, but there are few signs yet that QE is boosting bank lending. The latest money figures showed that annual lending growth to both firms and households slowed yet again in March.
  • Admittedly, the recent improvement in many of the economic indicators suggests that the economy is getting back on its feet without the need for significant further support from monetary policy.
  • The timeliest indicators of activity, the CIPS/Markit surveys, have risen to a level consistent with a quarterly rate of contraction in GDP of around 0.5%. The 1.9% drop in output seen in Q1 therefore certainly seems to have marked the low point of the recession. Even the housing market has shown tentative signs of life, with mortgage approvals rising for the past two months.
  • However, the various indicators have much further to rise before they are consistent with positive economic growth or rises in house prices, as opposed to a slowing in the rate of decline. Note that both the Halifax and Nationwide measures of house prices fell in March. In the meantime, the risk of a prolonged period of deflation remains ever-present. Particularly worrying was the drop in average earnings growth in February, to -2.8% in the private sector.
  • The MPC still has another £25bn of money sanctioned by the Chancellor which it can – and I think probably will – have to use. But if the recent signs of "green shoots" peter out, it will have to go back to the Chancellor to ask for even more. The markets' expectations of interest rate rises before the end of this year still look very misplaced to me.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.