WHY IS BANK OF ENGLAND IGNORING EVIDENCE THAT QE HAS FAILED?Thursday 5 July 2012
• QE benefits the banks – not the economy • We need a balanced analysis of the impact of gilt buying as QE has hardly stimulated growth • Further easing will be bad news for annuity rates, pensioners and pension funds
WHY IS BANK OF ENGLAND IGNORING EVIDENCE THAT QE HAS FAILED?
Following today’s announcement that a further £50bn will be added to the £325bn total of new money that has been pumped into the economy, Dr Ros Altmann, Director-General of Saga comments:
“With a double dip recession, falling bank lending, large numbers of unemployed and rising borrowing costs, we must questions whether QE has had the desired effect and in fact, through its impact on annuity rates and pension funds, whether QE may have actually damaged growth. We have been urging the Bank of England to hold off further QE until there had been a thorough assessment of its impact on our economy. We are deeply disappointed that it has ploughed on regardless.
“Following fresh banking scandals this week, it is especially difficult to understand why we are doing more easing which benefits the banks more than any other area of the economy. QE may well have shored up bank balance sheets (as well as helping some borrowers), but this does not boost the economy when banks are failing to lend on reasonable terms. QE relies on banks to recycle new money to the rest of the economy but the banks are not doing their bit. Lending to small and medium sized firms who have been crying out for credit has not come through on reasonable terms, while banks have boosted their margins and balance sheets instead.
“The Bank of England needs to stand back and examine whether this policy, which it has always admitted is just an ‘experiment’, is working and is acting as a stimulus for growth. Conjuring up a further £50bn of new money, in order to buy government debt at unprecedentedly expensive levels could be saddling future taxpayers with large losses when long term interest rates return to pre-recession levels.”
QE has impacted on annuity rates
On top of this, QE has reduced over a million pensioners' incomes via annuity and drawdown income falls. These effects destroy jobs and growth as they reduce spending for a growing proportion of the population, so it seems that policies designed to provide a temporary boost to our flagging economy could have actually had the opposite effect.
How Annuity rates have fallen in last 4 years
July 2008 July 2012 % change
Annuity rate 7.32% 5.62% 23% fall
FTSE 5625 5493 2.35% fall
15yr gilt yield 5.13% 2.34% 2.79 pp fall
Source: Better Retirement Group
QE has kept inflation higher than it would have been
Inflation, especially as it has been coupled with low interest rates, has sapped consumer confidence and damaged people’s spending as well as their savings. This is particularly an issue for older generations who rely on the income generated from the savings and whose consumption has fallen due to their falling real incomes.
QE has harmed corporate UK
QE has also has decimated corporate pension funds, forcing some firms into bankruptcy while others have had to divert resources into supporting their pension schemes rather than business expansion.
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