MPC right to hold QE, but pressure for increase mounting

4th April 2013

Commenting on today's Monetary Policy Committee (MPC) interest rate decision, David Kern, Chief Economist at the British Chambers of Commerce (BCC) said:   -We support the MPC's decision to maintain QE at £375bn, and hold interest rates at 0.

5%. However we are concerned that pressure is mounting for more QE later in the year, and an increase in the next few months is looking likely. Further increases to QE would be misguided, and provide only marginal benefits for the real economy while heightening risks of financial distortions, bubbles and higher inflation.   -We are concerned that the demand for more QE will be seen as part of a wider policy shift, whichimplies that the MPC is prepared to tolerate higher inflation and a much weaker pound. If true, this is problematic. Although higher inflation may ease the debt burden, it would squeeze businesses and consumers, and be more likely to weaken growth rather than strengthen it. Adding to QE would also weaken sterling further, and the damage caused by higher inflation and more expensive imports would outweigh the small benefits to exporters from a lower pound.   -The MPC should instead make better use of the existing QE programme and use measures other than QE alone to support a revival of business lending. Since UK banks are still weak, swift and concerted action on the government's pledge to create a fully-fledged British Business Bank is crucial.

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