Mpc Must Consider Measures Other Than Qe
07 September 2012 in Chamber News
Commenting on today’s Monetary Policy Committee (MPC) decision, David Kern, Chief Economist at the British Chambers of Commerce (BCC), said:
“The MPC’s decision to maintain QE at £375bn, and hold interest rates at 0.5%, was widely anticipated. After raising QE in July from £325bn to £375bn, the MPC is unlikely to consider further measures before implementing the increased asset purchase programme. “While weak growth and continued problems in the eurozone have heightened demands for more QE, an increase would be risky and unwise. With yields on gilts at very low levels already, adding to QE would only provide marginal benefits for the real economy, while creating longer-term risks of bubbles, financial distortions, and higher inflation.
“The use of additional QE to stem a fall in inflation below the 2% inflation target would be unwise. A temporary fall in inflation in 2013 would be beneficial, as it would underpin real incomes and support demand at a time when UK growth prospects remain weak. More QE should only be considered if problems in the eurozone pose new threats to the UK financial system. To support stronger UK growth, and help overcome the obstacles to a revival in business lending, the MPC and the government should use QE more effectively and should rely on other measures to stimulate growth.
“If the MPC agrees to purchase assets other than gilts, notably securitised SME loans, banks would be less risk averse in lending to businesses. In addition, the MPC could consider a reduction in the rate paid by the Bank of England on deposits held by commercial banks. This could discourage hoarding and may provide a useful incentive to increase lending. The creation of a British Business Bank would help new and growing companies to obtain the credit they need. The government should act quickly to translate the Chancellor’s recent support for a business bank into effective action.”