Holding QE the correct approach
7th February 2013
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 expected and in our view, correct. In spite of the decline in GDP in the fourth quarter of 2012, our members do not support some of the current gloom about the economy. Adding to QE should only be considered if new threats emerge to the stability of the UK banking system. In the meantime, we believe that more QE would only provide marginal benefits for the economy, while heightening longer-term risks of financial distortions, bubbles and higher inflation. "In anticipation of the arrival of Mark Carney as the next Bank of England Governor there is now an open debate on the monetary regime. At the Treasury Select Committee Mr Carney said that flexible inflation targeting is the most effective monetary policy framework implemented thus far, but that the framework should be reviewed periodically. This is significant in view of the remarks made by Adair Turner, the outgoing Head of the FSA, earlier this week, advocating permanent monetary financing of the deficit in some circumstances. These ideas could be problematic. Although higher inflation can ease the debt burden, it squeezes businesses and consumers and is more likely to weaken growth rather than strengthen it. "To boost growth, the Bank of England and the government should take more effective steps to support a revival in business lending. Since UK banks are still too weak, and the regulatory burden on them is likely to increase further, implementing the government's promise to establish a fully-fledged British Business Bank is clearly the most effective way of securing a meaningful increase in lending.