MPC should resist clamour for more QE

4th October 2012

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

5%, was widely expected. However, in reaction to renewed problems in the eurozone and continued stagnation in the domestic economy, many commentators expect a further increase in QE before the end of the year. While the pressures for more QE are understandable, we believe an increase at the present time would be risky and unwise. -With yields on gilts at very low levels already, more QE would only provide marginal benefits for the real economy, while creating longer-term risks of bubbles, financial distortions, and higher inflation. More QE should only be considered if tensions in the eurozone pose new threats to the UK financial system. To boost growth, the MPC and the government should take more effective steps to support a revival in business lending, both by using the existing QE programme more efficiently, 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. The Funding for Lending scheme must be implemented more effectively, and the government's promise to establish a fully-fledged British Business Bank must be activated without delay.