Quantative easing is flawed and interest rates should be raised today, say economists

4th August 2011

Today is central bank day with meetings at the Bank of England, the Bank of Japan and the European Central Bank. However, the majority view is that the Bank will sit on its hands this month, but a surprise monetary easing from the Swiss National Bank on Wednesday suggests nothing can be ruled out.

All economists polled by Reuters expect the central bank to keep rates at 0.5 percent at 12 p.m., but around one in four believe a second wave of quantitative easing (QE) will be needed at some point.

But would more quantative easing work?

The coalition government has made clear that the ball is in the Bank of England's court should further economic stimulus be required.

However, Mindful Money economist blogger Shaun Richards says that further stimulus would be unwise and simply delaying further economic problems on his blog: "…here is another factor that supporters of QE do not address further down the road even they will have to deal with the inflation they have created. Accordingly there is a scenario where in the medium-term we are worse off if we get little or no growth now and have to tighten policy later. So in my view this is yet another version of "kicking the can down the road"."

Why interest rates should be raised

Shaun adds on his blog: "I feel that we in the UK are facing a stagflationary scenario and have been arguing this for some time to which I am afraid there are no magic solutions only difficult questions which sometimes require difficult answers.

"I would raise UK interest-rates in response to this as a way of us beginning to edge our way out of our current problems. However there is a change in my view as I would currently only raise them to 1.5% rather than 2%. The reason for this is that the world looks like it is in a period of weak economic growth again and I feel one should respond to that. Should it be a blip then I could raise to 2% in a few months." Read more here.

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