Commenting on the choices facing the Monetary Policy Committee (MPC) at its June 2012 meeting next Thursday, David Kern, Chief Economist at the British Chambers of Commerce (BCC), said:
“Most commentators expect the MPC to maintain its current policy at next week’s meeting, with interest rates staying at 0.5% and the Quantitative Easing (QE) programme at £325bn. However, the economic situation has become more uncertain. The IMF has recently recommended that the MPC considers a cut in the current 0.5% rate, while the worsening eurozone problems have furthered calls for an increase in QE. While cutting the Bank of England’s lending rate may have a small effect, a reduction in the rate paid on deposits held by commercial banks will discourage hoarding and may provide a useful incentive to increase lending. Higher QE will have marginal effects only in boosting growth. But, if the eurozone situation starts causing more serious problems for the UK financial system, an increase in QE may be necessary.“The MPC’s main priority should be to help boost the flow of credit to businesses, particularly new and growing SMEs. The government can address the market failure in lending by creating a fully fledged business bank. The MPC can help the situation by reconsidering its reluctance to purchase assets other than gilts, notably securitised SME loans. Such a move would make the banks less risk averse towards small- and medium-sized businesses, thus helping to remove one of the main obstacles to a sustainable UK recovery. Given the vital need to encourage growth, we do not accept the argument that buying private sector assets would increase the moral hazard of irresponsible lending, or would entail interference with credit allocation.”