With the financial system facing renewed stress and global growth faltering economists at Goldman Sachs are predicting Britain will embark on a second round of quantitative easing in the coming months.
“A serious concern for the [Bank of England’s] Monetary Policy Committee (MPC) is that, having maintained policy rates at their floor for 2½ yearsand purchased 200 billion pounds [$322 billion] in assets already, lending supply remains highly constrained and effective lending rates remain high,” Kevin Daly, a European economist at Goldman Sachs wrote in a research note on Monday.
With the Bank of England worried about the cost of banks' funding and its impact on lending to businesses and consumers, Daly believes QE2 is likely to be the policy response.
“We believe that a strong case can be made for focusing QE2 on ‘credit easing’ (directly targeting the credit spreads that cause the problem), rather than on the purchase of government gilts,” said Daly.
This option is unlikely to be taken up according to Daly as the MPC believes this is the job of the government and fiscal policy.
“The question of how big QE2 is likely to be is intrinsically linked to which assets are bought. But if, as was the case in QE1, purchases are focused on government gilts, then a total of 100 billion pounds over two quarters is a reasonable central case,” Daly added.
If credit easing is not an option for the MPC, Daly believes just buying gilts would be a mistake.
“While we believe that QE2 would be significantly more effective if it were targeted on assets other than gilts, there are still likely to be significant positive benefits from a program of this type,” said Daly.