Britain is suffering from a double dip recession as Belsize and many other economists have been predicting for some time now. It is interesting to note that the government, the banks and the Bank of England have been in denial about this form some time now and have only recently begun to acknowledge that the double dip is real.
Interest rates have been kept at historic lows and the Bank of England (BOE) has continuously printed money via Quantitative Easing in order to stimulate the economy and forestall the recession. The effectiveness of the Bank of England’s monetary policy has finally come into question. The fact remains that the Banks Quantitative Easing policy is ineffective because rather than printing money, the BOE is buying gilts and effectively providing cheap finance to the banks. The banks, in turn, are not lending to businesses and are continuing to raise their overdraft, mortgage and credit card fees and thereby stifling the economy.
Put simply, the Quantitative Easing process is not filtering down to consumers and is therefore not stimulating growth as intended. Further, Quantitative Easing, or the act of printing money, attracts inflation and has a negative effect on savers and pensioners who will see their savings being eroded. Keeping interest rates low has a similar effect of stifling the economy as companies and individuals are likely to hold back on their investments until they are able to gain confidence that they can generate sufficient returns. Companies are currently offering little or no dividends as a result of the low interest rates as they cannot generate sufficient return on their capital.
The Bank of England must rethink their monetary policy and find other measures to stimulate growth. The Bank of England and the European Central Banks have suggested that interest rates will not increase anytime soon as they will not want to jeopardise the fragile state of the economy. It is not clear how long interest rates can be held at this level as low interest rates fuel inflation. We can expect there to be plenty of pain in the UK markets before we can reach equilibrium and the long anticipated recovery. The same can be said for the Eurozone, although on a much bigger scale.