Commenting on today’s Monetary Policy Committee (MPC) decision, David Kern, Chief Economist at the British Chambers of Commerce (BCC) said:
“We support the MPC’s decision to maintain QE at £375bn, and hold interest rates at 0.5%. However, we are disappointed that the pressure for more QE is mounting. Three MPC members, including Governor Mervyn King, voted for more QE in February, and most analysts are now predicting an increase in the next 2-3 months. We believe this would be misguided, as more QE would provide only marginal benefits for the real economy, while heightening risks of financial distortions, bubbles and higher inflation.
“We are concerned that the demand for more QE will be seen as part of a wider policy shift, which implies that the MPC is now prepared to tolerate higher inflation and a much weaker sterling. If true, this is problematic. Although higher inflation eases the debt burden, it squeezes businesses and consumers, and is more likely to weaken growth rather than strengthen it. Adding to QE would also weaken sterling further, and the damage that higher inflation will cause will outweigh the small benefits to exporters from a lower pound.
“The MPC should do more to support a revival in business lending, both by making better use of the existing QE programme, and by using measures other than QE alone. Since UK banks are still weak, acting on the government’s pledge to create a fully-fledged British Business Bank is the most effective way of securing an increase in lending.”