Pressure on the Bank of England to step up its quantitative easing (QE) came this week from the IMF. "Further monetary easing is required," it said in its regular assessment of the UK economy, warning that the risks to growth "are large and tilted clearly to the downside". This challenges Monetary Policy Committee member Paul Fisher, who said that the Bank would only consider more QE if the recession worsened.
This could happen, even if the euro crisis doesn't deepen. Figures released next week could show that UK manufacturers have rejoined their euro area counterparts in recession; that UK firms are still repaying debt; and that consumer confidence and retail sales are low. Nick Bate at Bank of America Merrill Lynch expects the Bank to announce another £50bn of QE in July.
In the euro area, policy easing is even more urgent. Even a small threat of Spain leaving the euro area could lead to massive withdrawals of deposits from its banks. Banks might not be able to plug this gap by borrowing from the European Central Bank (ECB) under its emergency liquidity assistance programme, because the terms of ECB loans under that scheme are often so onerous that it is infeasible as a large or long-term measure. This, says David Owen at Jefferies International, means that "a major policy response is becoming more and more imperative". He believes this would include the ECB finally adopting full quantitative easing.
Nor are economists ruling out such a move by the US Federal Reserve. Commerzbank's Bernd Weidensteiner says the possibility of the euro crisis deepening would have "significant adverse effects" on the US economy. This is not just because it would cut its exports, but rather because fears that banks would lose billions of dollars would reduce their lending. The Fed could, he says, react to this by restarting its large-scale asset purchases policy .
All this has at least two implications for investors. One is that it will prolong the squeeze upon real interest rates; although QE is intended primarily to raise real economy activity, it also adds to inflation.
It could also boost commodity prices, as some of the extra money printed is used to buy these. Despite the weakness of western economies, oil and commodity prices are twice as high as they were in 2008-09, which could be a sign that the hope of more easy money is buoying them up.
