Graeme Leach, chief economist at the Institute of Directors, explains why he thinks the quantitative easing (QE) gun is about to be reloaded.

Graeme Leach, chief economist at the Institute of Directors, explains why he thinks the quantitative easing (QE) gun is about to be reloaded.

Weak retail sales figures and an increase in unemployment suggest that the economic recovery is softening. However, the really critical factor is that money supply growth has been very weak indeed, leading to doubts about the sustainability of the recovery.

The overall amount of money in the economy increases when banks lend cash, effectively creating it from nothing. Banks are still doing this, but not as much as they were, and they are being required to hold more capital in relation to their lending.

Quantitative easing (QE) is a way to “bypass” the private banking system by having the Bank of England inject money into the economy. Some £200 billion has already been added to the economy through QE, which admittedly didn’t create a huge economic recovery, but it did prevent us from sliding into depression and deflation as well as lowering long-term interest rates. I believe we need another dose of QE, perhaps £25 billion to £50 billion over the next three months, to stimulate money supply growth and bring it closer to where the Bank would like it to be.

There are those who worry about inflation, which is above target, but with such a weak rate of growth there is no great pressure on wages and prices. Spare capacity in the economy is dampening inflation, and will continue to do so. Instead, the real risk is of a double-dip recession. With interest rates at 0.5 per cent, any further cuts would be window dressing, so QE is about the only weapon the Bank of England has left.