Business groups welcome renewed QE but demand further action

Simon Nias
Thursday, October 6, 2011

Business groups have welcomed the Bank of England's decision to pump a further 75bn into the economy following today's announcement that it would once again fire up its metaphorical printing press to try to revive the UK's flagging recovery.

The Monetary Policy Committee's decision to maintain interest rates at 0.5% and to restart Quantitative Easing was widely heralded following the downgrading of the UK growth figures for Q1 and Q2, the latter of which halved to just 0.1%.

As a result the MPC voted to increase the size of its asset purchase programme for the first time since November 2009; however, whilst most analysts had predicted a £50bn increase, the MPC decided more dramatic measures were needed, resulting in a £75bn increase to £275bn.

David Kern, chief economist at the British Chambers of Commerce (BCC), said: "UK businesses welcome the MPC's decision to increase the QE programme to £275bn. In the face of the risks facing Britain’s recovery, it is important to make every effort to underpin business confidence and avoid a setback."

He also praised the chancellor George Osborne's announcement of a new "credit easing" scheme, made in his party conference speech on Monday, but warned that it would take time to come on-stream and urged the Bank of England to take "more radical measures" to support businesses in the interim.

"The Chancellor’s intention to use credit-easing methods to help stimulate the flow of credit in the economy is a welcome initiative, but its implementation will take time and the MPC is better placed to move more quickly," said Kern.

"There is a strong case for the MPC to help boost bank lending to businesses by immediately raising its purchases of private sector assets. For QE to be truly effective, it is critical that the additional funds should urgently go into the real economy.

"The Committee should also impose negative interest rates on deposits held by commercial banks at the Bank of England, which could help to boost the availability of credit.

"By confirming that interest rates will not be raised until the end of 2012, as the Fed has done in the US, the MPC can help to underpin business confidence. We appreciate that the MPC must be concerned over above-target inflation, but this is likely to fall next year, while the threats to growth are more serious at the present time."

Ian McCafferty, CBI chief economic adviser, added: "With the risks to the economic outlook increasing, the MPC has acted promptly by extending quantitative easing this month.

"This measure will help support confidence, but we need to recognise that its impact on near-term growth prospects is likely to be relatively modest. Only once the turmoil in the Eurozone is resolved will confidence be fully restored."

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