Helen Thomas

Today ‘s Bank of England meeting should herald the start of the somewhat mystical practice known as “Quantitative Easing”. This prospect of printing money has prompted panicked headlines about Zimbabwean- style inflation.  But the process itself does not necessarily spell disaster. Normally the Bank manages inflation and activity indirectly, through interest rates.  Lower rates encourage more spending and less saving, and higher inflation. But in the current environment, even near zero interest rates are not enough to fight deflation, so unorthodox measures are needed.  The Bank of England is going to try and increase the supply of credit directly, by buying up corporate bonds from financial institutions.

We have become used to dealing in £billions since the onset of the banking crisis. With the economy facing such a dire economic outlook, there is a sense that many more £billions should be thrown at the problem – but the danger is that, in our desperation for a solution, we rush headlong into potentially more destabilising circumstances. The UK is in a particularly tricky situation, with the European Commission expecting our deficit to deteriorate to 6.5% in 2010 (the second highest borrowing forecast among the 27 member states), and the Financial Times reporting a probable rise in public borrowing to £120bn. This causes a problem with regard to credibility: will the stimulus be reversed to put the government’s house back in order?