MPC should do more to boost business lending rather than increase QE

31st August 2012

Commenting on the choices facing the Monetary Policy Committee (MPC) at its September 2012 meeting next Thursday, David Kern, Chief Economist at the British Chambers of Commerce (BCC), said: -We expect the MPC to make no changes this month, holding interest rates at 0.

5% and the Quantitative Easing (QE) programme at £375bn. But most analysts predict a further increase in QE in the next few months, in response to worsening global growth and the prospect that UK GDP will shrink in 2012. We believe that adding to QE would be misguided and counter-productive at the current time.  -QE played a valuable role in the early stages of the financial crisis in 2009. But, with yields on gilts at very low levels already, more QE would only provide marginal benefits for the real economy, while increasing the longer-term risk of financial distortions, bubbles and higher inflation. An increase should only be considered if eurozone problems pose new threats to the UK banking system, and should not be used to prevent inflation from falling below the 2% target in 2013. A temporary fall in inflation would be beneficial, as it would underpin real incomes and support demand at a time when UK growth prospects remain very weak.  -To boost growth, the MPC and the government should support a revival in business lending, both by using the existing QE programme more effectively, and by employing tools 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. And to improve the flow of credit to businesses in the long-term, the government must give serious consideration to the creation of a fully-fledged British Business Bank.