Institute of Directors Calls for More Quantitative Easing
The Institute of Directors (IoD) is calling for a £50 billion extension in quantitative easing, the unconventional monetary policy whereby a pre-determined quantity of money is injected into the economy.
Graeme Leach, Chief Economist at the Institute of Directors said:
"The time to launch QE2 has arrived. The downside economic risks are sufficiently great to warrant an extension in quantitative easing now, in order to avoid the risk of a double-dip recession. We already have an L-shaped economic recovery and the hit to business and consumer confidence over the summer risks a slip back into recession, which could have dire fiscal consequences. Expanding QE by £50 billion initially is a sensible and limited response."
The Institute of Directors says that an extension in quantitative easing is supported by a number of factors:
Money supply growth is very weak and consequently hopes for sustained economic recovery rest on an increase in the velocity of money (the number of times money changes hands). However, the IoD argues that the velocity of money is just as likely to decline as increase over the coming months. The IoD says that it is too risky to pin hopes of continued recovery on an unpredictable velocity of money.
The knock-on effect of the euro-zone crisis is damaging business confidence and leading to the postponement of investment projects. Given the weakness of the recovery to date, business and consumer confidence could be the tipping point between recession and recovery.
Continued de-leveraging and increased capital requirements in the banking system suggest that money supply growth will remain close to zero without QE2.
The fiscal consequences of a double-dip recession could be dire. The future fiscal risk warrants a monetary easing now.