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Further quantitative easing seems inevitable, says Newton’s Paul Brain

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Paul Brain, manager of the Newton International Bond Fund, says further quantitative easing seems inevitable and it is now a question of when, rather than if, it might be implemented.

His comments follow statements from the International Monetary Fund and UK’s Monetary Policy Committee last week regarding the state of the UK economy.
 
“While the UK’s coalition government reacted with glee at the news of such high profile backing for its planned cuts, in reality the IMF’s comments were a confirmation that it is merely happy with the UK’s commitment to permanently reduce its GDP and embrace a period of below-trend growth – not exactly what the headlines suggested at the time,” says Brain. 
 
Meanwhile, the following day, Adam Posen, a member and long-time “dove” of the MPC, publicly stated the case for further quantitative easing in the UK, arguing that it was deflation rather than inflation which posed the greatest threat to the UK economy. 
 
“Posen is an expert on Japan’s economic problems of the 1990s,” says Brain, “and his argument that ‘policymakers should not settle for weak growth out of misplaced fear of inflation’ in the face of sub-trend growth does add up. While he reiterated that the views were his own rather than those of the MPC, it seems likely that his speech was a warning shot from the broader Bank of England, paving the way for QE and in so doing preparing the market for such an eventuality – sterling weakened following news of his comments,” he adds. 
 
Brain says further quantitative easing would boost consumer confidence and also engineer a more positive outlook for the UK economy, despite the looming spectre of high unemployment and spare capacity in the economy.

There are also risks associated with the recommencement of quantitative easing, namely overdoing it and creating an inflation bubble.
 
Posen’s comments echoed those recently made by James Bullard, a member of the US Federal Open Market Committee.

“However, the issues facing the US economy and its need for QE are arguably much greater than the UK; there are more urgent worries over the prospect of deflation, while fiscal cuts have already hit the economy hard, especially at state level where Federal support has all but dried up. Furthermore, the US housing market remains a significant drag on growth, and with QE having a direct positive impact on mortgage rates, this might boost the beleaguered sector,” adds Brain.
 
“Evidently there is a tight balancing act facing the UK government and BoE, between fiscal austerity and maintaining a fertile economic environment for sustained growth. As yet, the UK’s economic backdrop is somewhat misleading – the economy has grown in the past three quarters – but this is on the back of the stimulus measures seen over the past year or so. It will only be when the government’s austerity measures take grip that we will see the true extent of the hit on economic growth.”

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