Press release


Wednesday 7 November 2012

• Buying gilts does not directly stimulate the economy - it distorts asset prices
• QE is policy experiment with damaging side-effects and Bank has no idea how to reverse it


Ahead of tomorrow’s MPC meeting, Dr Ros Altmann, Director-General of Saga, warns that the Bank of England should hold back from further gilt-buying measures:

“It is essential that the Bank of England holds back on further gilt-buying in November.  The Bank itself has always admitted that Quantitative Easing (QE) is a drastic policy experiment which it has introduced because 'conventional' policies had been exhausted.  Creating new money to buy Government bonds may have been worth trying in 2009 to avoid deflation but the economic problem now is stagflation, not depression.

“In fact, even as the economy was recovering and inflation stayed above target, the Bank carried on buying more gilts.  With inflation pressures rising again, the Bank should more carefully assess the effects of QE before instigating any more measures.  Buying gilts is effectively interfering with the risk-free interest rate and distorting asset prices.  This may feel good short-term, but carries significant longer-term dangers which the Bank has not even begun to address. It has no idea how it will reverse this policy experiment.

“Last month’s ONS National Economic Wellbeing report indicated that QE may actually have been responsible for a slower economic recovery than we experienced during both the 1979 and 1990 recessions.  The ONS pointed out that the combination of low interest rates and high inflation had disastrous effects on disposable incomes and spending power of millions of households, which weakened economic growth.

“QE has also damaged corporate pension funds forcing firms to plug their pension deficits rather than using money to create growth and new jobs.  A reassessment of the stance of monetary policy is urgently required and the Bank would do well to carry out more detailed analysis, as well as assessing other stimulus measures, before embarking on any more gilt-buying.

“We clearly need more direct stimulus of economic activity.  It would be wise to give 'Funding for Lending' a chance and also encourage using pension assets to fund construction and infrastructure projects.  These are far more direct way of boosting growth and jobs - and will have much less damaging side effects, than relying on buying gilts that have already been pushed to extreme levels.”