At the first Central Banking On Air event of 2012, there was broad agreement among the panel that quantitative easing (QE) is achieving its stated aims. There was divergence of opinions on what the broader priorities for central banks should be in the medium term, however.
The panel comprised Andrew Smithers, chairman and founder of Smithers and Company, an investment advisory firm, Richard Portes, a professor of economics at the London Business School, and Paul Mortimer-Lee, global head of economics at BNP Paribas. The wide-ranging discussion centred on the impact of QE on the global economy.
Mortimer-Lee argued that a legacy of the QE strategies deployed by various central banks is that focus has shifted from the institutions being principally concerned with achieving price stability, to the primary goal being achieving growth. He said QE is "decisively working".
Portes said QE has had a profound effect on shaping future monetary policy because it has lowered expectations of what interest rates will be in the future, which will influence the real level of rates in coming years.
Smithers was quick to highlight the impact QE has had on asset and equity prices, which he said are above their equilibrium point due to the impact of policy moves.
Drawing murmurs from his fellow panellists, Mortimer-Lee described the Federal Reserve's current position as "over-committed" in its pursuit of a loose money policy. He said it was "dangerous" to promise policy stances on a longer term as situations were difficult to predict. His view was broadly endorsed by Smithers, who argued that QE is maintaining asset markets at an unsustainable level, which the Fed was perpetuating with its wider macroeconomic policies, leaving it intrinsically vulnerable if it wishes to pursue tighter monetary policy in the coming years.
All three panellists agreed that the central banks that have pursued QE will face a dilemma in the future, as they try to work out how to stop offering QE without causing a crash to the wider asset and equity markets.
On the broader question of whether the aim of QE should be focused on helping banks, the panellists each approached the question from a different perspective. Mortimer-Lee said that while QE helped to create a floor beyond which bank lending to the private sector would not fall, further QE would have a minimal impact on lending. Portes said that: "The European Central Bank finds itself in a position where it now holds many types of collateral which it would not previously have envisioned holding; this has had a major impact on market confidence in banks."
Smithers argued that further QE at this point in the cycle would not result in the banks lending more to the wider economy, as the expectation of further QE has already been built into the forecasts of the clearing banks, so any further QE would not serve its purpose. Smithers highlighted the fact that the QE2 capital injection by the Fed had a much reduced impact when compared to the first round of easing, because market expectations had already been set.
Turning their thoughts to the future, all three members of our panel agreed that further easing should be pursued in future, with Smithers arguing that there should be a shift in emphasis: "Central banks should start buying foreign bonds, not just their own government debt."