The Bank of England said today that it was stopping its programme of creating fresh money - Quantitative Easing (QE.) I suspect the move is permanent but the Bank has given itself room to start the printing presses again should it be necessary.
So has QE been a success?
It's become fashionable to knock QE. For example, pensions campaigner Ros Altman is a virulent critic of the programme. Opponents have two main lines of attack:
- The economy is still very weak. We're barely out of recession, so QE hasn't worked.
And/or
- QE has created the conditions for inflation to take off in a big way later this year or in 2011.
Let's deal with the weak economy first. There's no question that the fourth quarter economic growth figures were disappointing. What's more, consumer credit fell in the second half of last year. Banks are still reluctant to lend.
But you have to remember that things might have been even worse without QE. And the programme also helped to keep long-term interest rates low. That's because the Bank of England used its newly-created money to buy gilts issued by the UK government. That kept the price of gilts high which meant that yields were low. In other words, the government could borrow cheaply.
Low gilt yields also fed through to lower long-term interest rates for the rest of the market. That's meant lower rates for things like 5-year fixed rate mortgages.
As for inflation, I still remain more sanguine than many other commentators. True, I can't completely rule out inflation taking off. We've been living in unprecedented times and no one can predict for sure the impact of QE and ultra-low interest rates. But I still think high inflation is an unlikely scenario.
As the Bank of England pointed out today, there is a substantial amount of unused capacity in the UK economy, so as things pick up, businesses can raise output without big rises in prices.
And even more importantly, pay growth has remained 'subdued', according to the Bank. Inflation hawks worry that once workers expect inflation to take off, they will start pushing for big pay rises, and inflation will become embedded in the economy. But, in reality, there's no sign of that happening. I think the average Brit is still scarred by the 2008 crisis. If he has a job, he's delighted and he's not going to start pushing for big pay rises any times soon.
So what now?
Today's statement makes clear that the Bank still thinks that inflation will probably fall below 2% in a few months' time. I think the Bank is probably right about that and I suspect the base rate will most likely stay at 0.5% until the autumn. Maybe even later.
My big worry for the rest of this year is not inflation. It's a fear that the UK economy could return to recession. Things are fragile right now and could get even worse if markets start to really panic about the high level of UK government debt. If that happens, long-term interest rates will rise and everyone will feel pretty gloomy.
So even though the Bank of England's base rate will probably stay low, rates on long-term products such as five-year mortgages may well rise. No fun at all.