Βι¶ΉΤΌΕΔ

For once, the Monetary Policy Committee has pulled off a positive surprise.

When the Bank's policy-making committee said last month that they wanted to wait and see before deciding to continue with quantitative easing, the markets reeled at the policy's "imminent" demise.

Officials said we shouldn't jump to any conclusions about the future of QE. They really would "wait and see". But private and public remarks by some officials led people to suspect that they would put the policy on pause.

Earlier today, I did say it was quite possible that the Bank would decide to spend another Β£25bn, but spend it more slowly. In the event, . But they are going to spend it more slowly.

I'm no conspiracy theorist. I don't think they planned to wrongfoot the market. But given what I said earlier about the policy's potential to affect confidence, it will have been no bad thing, from the MPC's perspective, that traders were expecting them to do less. The yield - or interest rate - on ten-year government bonds fell 15 basis points (0.15 of a point) in response to the news.

To date, the Bank has been spending about Β£25bn a month. Now they are going to spread Β£50bn in purchases over three months. It's possible to read too much into this - officials themselves like to emphasize that QE is not an exact science.

By taking three months, rather than two, they can put off another decision on QE until the November Inflation Report. But you can at least conclude that they don't think the economy's need for cash is quite as urgent as it was before.

What does this decision tell us about the Bank's view of the economy? Well, to state the obvious, it thinks that QE has more to do.

The Bank has been sceptical of the early estimates for GDP in the past - their growth forecasts show a range of possible final outcomes, for the past performance of the economy as well as the future. And indeed, the Bank - along with some other commentators - may well expect the disappointing second quarter estimate to be revised upwards.

But today's statement suggests they have taken that first estimate seriously enough to revise down their forecasts for past and future growth - at least for 2009. Despite today's encouraging news about rising car sales and, possibly, rising house prices, the Bank's policy makers probably believe there is still greater risk in doing too little than in doing too much.

A pause, but not an end.

If the Bank of England's Monetary Policy Committee today decides not to inject any more money into the economy this month, many will say that the experiment with quantitative easing is at an end. Or at least that it is on pause.

But that won't be the Bank's view. For them, QE has barely begun. And for the policy to work, it's quite important that we think they're right.

Confused? Go back to the basic idea of QE. As I've discussed before (see my earlier posts QED and Does size matter?), what the Bank thinks is important is how much money is created under the policy, not how long they spend creating it, by actually buying assets.

That's one reason the MPC has authorised the Bank to spend Β£125bn - or nearly 9% of GDP - in just five months.

If they thought that it was the steady drip-feed of asset purchases that mattered, they might well have spread the same amount of "quantitative easing" over a longer time.

They moved more quickly, because they thought the key was to get that dollop of new money into the system.

Has it worked?

Once again, we may never know for certain, but it's certainly too soon to say now. It depends on where you expected QE to do its work - and what you think might have happened without it.

According to the Bank's own explanatory pamphlet on QE (a page-turner if ever there were one):

"[U]ltimately, what matters is the degree to which the cash injection boosts the growth of money and spending by households and businesses and so helps to ensure that inflation is close to target".

Where might such an effect first show up?

The Bank has suggested that the place to look is the quarterly figures for broad money growth (M4) - adjusted to strip out distorting transactions within the financial sector.

As it happens, the latest data, for the second quarter, were released on 4 August.

The new numbers were more encouraging than the previous monthly figures had been: at least they showed the broad money supply growing faster than in the first three months of this year, when the outlook for the banking system and the economy was so bleak.

But not much faster: it grew at an annualised rate of 3.7%, up from 3.3% in the first quarter.

Now, the policy could be helping the economy in ways that don't (yet) show up in M4: for example, if corporate borrowing rates had come down in the private bond markets.

Or if the institutions selling all those billions of government bonds (gilts) to the Bank of England used the cash they got to buy debt or shares issued by the banks.

In the latter case, the new cash wouldn't show up in M4 any more, but it would be good news for the banks.

Bank officials have offered these and other explanations for the continued weakness of the broad money figures.

But, by their own arguments, for QE to work, the money has to show up in M4 sooner or later.

That fall in borrowing rates (or corporate bond yields) needs to actually encourage companies to borrow more, and the banks need to see that improvement in their balance sheets as a reason to lend more.

Indeed, the latest report of the Monetary Policy Forum, created by Fathom Consulting, argues that:

"[T]he real measure of success is not whether QE has managed to increase broad money growth one for one [ie by the full Β£125bn], but rather whether it has brought forward new lending to, or deposits from the private sector. In other words, whether the money multiplier is not one, but two or three. That would imply that for every Β£1 created by the BoE, another Β£2-3 would be created by the banking sector and lent out. That is patently not the case."

You have to sympathise with the MPC. It's plausible that the effects of the policy will take time to show through.

In that sense, it is quite reasonable to announce a pause after this meeting - or perhaps, spend the remaining Β£25bn authorised by the chancellor over a longer period of time.

But the Bank's policymakers also know that if they decide, say, in December, that the economy needs more than Β£125bn (or Β£150bn), they will probably wish they had expanded the policy now. Such is life for the MPC.

What is most important - through all the uncertainty - is that everyone understands what they're doing.

In the past I've talked about various technical "channels" through which QE might help the economy.

But arguably, the single most important channel is also the most nebulous: its effect on confidence.

Back in March, the most important thing about QE was that it was something the Bank could do after it had run out of room to cut interest rates.

The simple assurance that the central bank had more tools in its toolkit sent a powerful message, at a critical time for the financial markets. You don't want your central bank to tell you it has nothing left it can do.

It's possible that QE will never have more impact than on the day it was announced.

That doesn't mean the money itself won't have an impact. It does make it that much more important that the MPC today explains very clearly what it is, and what it is not doing - and why.

The wonders of live television. As some of you may have heard, I took a turn presenting the Andrew Marr show yesterday. I was hoping to create some news stories for the Monday papers, as Andrew often does. And I did. But not in quite the way I'd hoped.

With four wide-ranging interviews to prepare for, I had read up on everything from the UK-US extradition treaty to Maureen Lipman's stage career. Little did I realise that my greatest challenge would be General Sir Mike Jackson's mobile phone. You can watch what happened below.

It is somewhat disconcerting that the former head of the British army doesn't know how to switch off his phone. But clearly, the moment had great comic potential. If only we hadn't been in the middle of discussing Afghanistan.