Quantitative easing impact on economy still not evident

Three months after the Bank of England announced its quantitative easing programme, its effects on the real economy are yet to be seen.

According to Ted Scott, Director, UK Strategy at F&C, it will still take some time for the increased money supply to feed into the real economy.

"I think the economic effect will be positive but will become evident only when the banks have enough confidence to increase lending again and consumers get more confident about the future," Scott commented. He added: "The good news is that this deleveraging is happening faster than analysts were expecting at the beginning of the year."

With the cost of money at virtually zero, the debt-laden consumer is feeling better off, being reflected in repaying debt and increasing savings.

"The improved momentum, helped in part by the rise in equities and other asset prices, is likely to bring forward the time when the injection of liquidity is manifested in higher lending, consumption and industrial production," Scott explained.

Regarding the likely impact of quantitative easing on the future performance of the UK equity markets, Scott believes that this will very much depend on the nature of the economic recovery.

"The objective of quantitative easing is to hasten growth but without too much inflation, while lancing the boil of possible deflation. The last possibility will be the worst outcome for equities but the markets are now largely convinced that it is a remote outcome," he explained.

For Scott, the optimum outcome would be if recovery was induced relatively quickly while keeping inflation in check. "It is too early to say this is going to be the case and a more protracted recovery is the most likely scenario," he said.

Scott concluded: "On balance, I think that quantitative easing is a sensible strategy that should be applied only in times of acute crisis when deflation is a real threat. So long it is managed carefully and the exit strategy us applied sooner rather than later, it has a good chance of being regarded as a success."