No-one was surprised at all when the MPC kept Bank Base rates on hold yet again, but the key question for the Bank however, was never around the Bank Rate itself, but around the future of the Quantitative Easing (QE), campaign. The surprise here, of course, was that they decided to INCREASE it’s policy of QE by a further £50 billion.
This is a major sign that the Bank is erring on the side of caution to make sure the recent encouraging signs are nurtured and shows how fragile the lending market is.
The main issue with the whole QE concept is that we may not be able to judge the full effects of the project for a while yet, as the Bank of England themselves states, “the results of the exercise will not be known until at least nine months from the start of the plan, which began in March this year”.
For many, however, it is hard to believe that we could be coming out of the recession so quickly, whatever the latest data suggests. During all recessions there seems to be a “false dawn” period before a further slump and some commentators point to the fact that because the financial industry has been propped up artificially by the taxpayer, once this runs out we will see a further fall.
However, these latest statistics seem hard to ignore. Halifax, Nationwide and the Land Registry all suggest house prices are rising again, the service sector is reportedly growing at its’ fastest rate for 18 months, and even industrial production rose unexpectedly from May to June.
In the mortgage market we have seen the tentative return of foreign banks, house builders are reporting a new wave of buyers purchasing off-plan again and London estate agents are getting excited again.
Meanwhile economists continue to argue about the shape of the recession, with a U shape or a W shape being the main contenders. I believe we will see a perverse combination of the two, or as a learned friend said a “W shape written by a lazy man” – a slight improvement, a slight fall, and then the growth. The main issue is that the economy is still standing on capricious grounds and any issues could have a larger effect than normal.
Whatever happens next, most people agree the worst is now behind us, and we can now at least begin to move forward albeit cautiously.