Do not increase QE and help boost lending to businesses

2nd November 2012

Commenting on the choices facing the Monetary Policy Committee (MPC) at its November 2012 meeting next Thursday, David Kern, Chief Economist at the British Chambers of Commerce (BCC), said: -Until recently, there were strong expectations that Quantitative Easing (QE) would be increased in November, but there has been a distinct change in recent weeks.

The MPC minutes for October reveal strong disagreements amongst members. Following better than expected Q3 GDP figures, and speeches by MPC members raising doubts about the effectiveness of QE, the prospect of an early increase seems less likely. We welcome this shift in opinion, as we believe that adding to QE would be misguided and counter-productive at present. -Adding to QE should only be considered if new threats emerge to the stability of the UK banking system. With yields on gilts at very low levels already, more QE would only provide marginal benefits for the real economy, while increasing longer-term risks of financial distortions, bubbles and higher inflation. With inflation likely to increase next month and fall less than initially thought in 2013, it reinforces arguments against using QE to limit falls in inflation. A fall in inflation would be beneficial, even if the rate moves temporarily below the 2% target. Lower inflation would underpin real incomes and support demand, at a time when UK growth prospects remain very weak. -To boost growth, the MPC should support a revival in business lending, both by using the existing QE programme more effectively, and by using measures other than QE alone. If the MPC agrees to purchase private assets other than gilts, such as securitised SME loans, banks would be less risk-averse in lending to businesses. Efforts must be made to ensure that the much-heralded Funding for Lending scheme benefits businesses in the real economy, and the government's promise to establish a fully-fledged British Business Bank must be followed through without delay.