MPC must reinforce measures to increase lending to business
5th December 2012
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 no surprise. It should be noted, however, that there has been an increase in QE with the recent transfer of accumulated gilt coupon payments from the Bank of England's Asset Purchase Scheme to the Treasury. While we welcome the recent shift of opinion against adding to QE, we are concerned that the Committee remains divided on the subject and an increase shouldn't be ruled out. -We believe that a further round of QE should only be considered if new threats emerge to the stability of the UK banking system. An increase would only add to longer-term risks of bubbles, financial distortions, and higher inflation, with little benefit to the UK economy. The new OBR forecasts reinforce the arguments against adding to QE, with annual CPI inflation expected to remain above the 2% target for a considerable time. Higher inflation would squeeze disposable incomes and would threaten any revival in growth. -To boost growth, the MPC and the government should do more to support a revival in business lending, both by using the existing QE programme more efficiently and by exploring other measures. 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. The poor results from the Funding for Lending scheme earlier this week add weight to the case for a fully-fledged British Business Bank. Although the Chancellor confirmed his support for this in his Autumn Statement, we were disappointed that there was no clear timetable for the Bank's creation. We would urge the government to act swiftly so that funding reaches viable, growing companies, which will in turn drive economic growth.