Some analysts have suggested that the ongoing programme of quantitative (QE) easing has potentially creating an addiction for the UK economy such that if we were to stop QE it could have a negative recessionary impact.

So far the BoE has implemented £175 billion of QE with a further £25 billion announced yesterday. There is no doubt that QE has prevent a more severe recession, many analysts have reported this. But, the concern is what happens when QE stops, which it will at some point.

The current view by some is that the way QE has been implemented, effectively buying back Government bonds, has simply freed up “cash” for the previous holders of those bonds to invest elsewhere. According to some this “elsewhere” investment is actually the stock market which has seen a strong rally in the past 12 months. So one theory is, if QE stops, will this cause a fall in share prices and potentially trigger a contraction in growth and even possibly push the economy backward into negative growth?

No one knows for certain how markets will react, but clearly the action of halting QE will need to be managed in a way that minimises any negative impact on the economy. Perhaps more importantly is when will we start to withdraw the (current) £200 billion from the economy. When this happens it will have further effects possibly restricting growth and inflation. This last point could be relatively positive, unwinding the QE in the economy could help to prevent excessive inflation – which some have said may follow in the coming years.