Bank of England pumps up volume

The Bank of England yesterday decided the financial crisis in Britain remains so serious that it can't afford to stop printing money.
Just halfway through a £75 billion ($190 billion) quantitative easing programme the bank has decided to pump a further £50 billion into the economy. That takes the total committed to £125 billion and leaves £25 billion up its sleeve before it hits an upper limit set by Parliament.

In a short statement the Bank warned: "Stimulus should in due course lead to a recovery in economic growth ... But the timing and strength of that recovery is highly uncertain."

It is good to know that we can still be certain of uncertainty in these troubled times.

The Bank's view was at odds with newspaper headlines in the UK this week. They were quite certain there were signs of recovery about. The media has latched on to the "green shoots" concept as if it were a farmyard animal related flu strain. Some headlines have boldly declared the worst of the recession over.

Equity markets are rallying and the three-month London inter-bank lending rate (Libor) has hit a record low below 1 per cent - although longer-term lending is still all but frozen.

These are real greenish, shootish sort of things. But the rest of the positive news is just a grab-bag of economic data which indicate a slowdown in the rate at which things are getting worse.

To view that as evidence of recovery one has to assume that the data will follow a graceful avian arc down into the depths of recession before soaring back up to blue skies of prosperity.

It would probably be the first time in history if it does. When the graph of this era is passed from economists to historians it will go down and it will go up again but it will do so in the steady hand of a four-year-old on a sugar high.

The Bank's dose of realism hasn't made much of a splash with the British public - even though they are the ones paying for this spend-up.

Public interest in the announcement was muted by the slim to non-existent chance that the Bank would move interest rates. At 0.5 per cent the rate is already the lowest on record (records which date back to 1694).

It is so low that any movement would be unlikely to change the rate retail banks charge borrowers. So the decision on how badly the system is still in need of easing was the biggie.

The immediate impact was to cause the value of the already battered pound to drop against the US dollar and euro. When you print money, you lower its value. Less than an hour later though it was the euro that was dropping as a reluctant European Central Bank (ECB) dropped its interest rate to 1 per cent and then surprised the markets by joining the Anglo-American cash-creation party.

Okay, the proudly undemonstrative ECB chairman Jean-Claude Trichet isn't about to let Europe become the life of that party.

The Euro Zone has committed to generating €60 billion ($135 billion) to buy one specific class of bond.

For a region with more than five times the population of the UK that's a bit like turning up to a keg party with one bottle of Beaujolais - and drinking it all in the kitchen.

But they have turned up and in doing so have acknowledged how serious the crisis remains in Europe.

In the UK the Bank of England is at pains to point out that the magic money will not actually be printed, it will be created electronically. It will be used to buy bonds and other financial products thus putting some fresh cash in the pockets of investors and banks.

It might be starting to work. It is good news that the three-month Libor is so low.

But as long as it is only short-term rates that fall, banks and businesses will continue to live hand to mouth.

New Zealand - where banks rely on Northern Hemisphere cash for about 40 per cent of their funding - remains caught in the thick of all this.

If New Zealand's banks have any hope of passing on the rate cuts already made by our Reserve Bank, then that hope rests to a large extent on the success of quantitative easing in the UK, US and Europe.

Liam Dann is in the UK on the Newspaper Association's Cardiff Fellowship, with support from the British High Commission and Air New Zealand.