QE has not yet improved lending, says Sentance

High street banks still very cautious about loans, says BoE's external policymaker
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The Independent Online

Fresh doubts about the strength and sustainability of Britain's economic recovery emerged yesterday. One of the nation's leading economic think-tanks suggested that a "double dip" recession could come next year, and a senior Bank of England policymaker warned that the Bank's inflation forecast might prove too optimistic – implying that rates may rise sooner an faster than expected.

Andrew Sentance, an independent, external member of the Bank's Monetary Policy Committee broke ranks, saying: "As we look further out ... the Inflation Report projections are highlighting the risk of keeping policy too loose for too long."

He also admitted the Bank's £200bn programme of quantitative easing (QE), which injects money and spending power directly in the economy, had not yet had the desired effect, despite some £175bn already having been spent by the Bank in buying gilts and corporate bonds.

Mr Sentence also agreed with external critics and at least one other MPC member, Adam Posen, that bank lending, of particular importance to the housing market and smaller businesses, was weak and impeding recovery. So far, QE has had only a limited effect on the supply and cost of loans and overdrafts.

"We have yet to see the potentially significant impact that quantitative easing could have on spending by households and firms," Mr Sentance said, adding that the international financial crisis had "caused banks to become much more cautious about lending, limiting the access of smaller firms and some households to finance and making the terms and conditions attached to new borrowing much less favourable".

The recovery, Mr Sentance went on, was only just beginning and that "though we have seen a wide range of signs of recovery ... we are still in the very early stages of a resumption of growth". Official gross domestic product fell again in the third quarter, with a contraction of 0.4 per cent. Most economists believe the economy is now in growth, however, although it may prove be fitful as taxes and fuel prices rise in the new year.

The Centre for Economics and Business Research (CEBR) consultancy also highlighted the risks facing the UK next year, saying that "with business investment still on the back burner, government spending stymied by the run-up to the election and no further boost from the end of destocking, it is quite likely that economic growth will stutter in early 2010". "A W-shape is well within the margins of forecasting error – not great for the unlucky Gordon Brown in the run-up to an election," the CEBR added.

Despite sterling's value falling by 20 per cent in two years, Mr Sentence shed doubt on the UK's ability to grow through exports and the revival in global demand. "We cannot expect Asia and other emerging markets to shoulder the whole burden of global recovery," he said. A synchronised recovery, albeit one so far with Britain conspicuously absent, could lead to the re-emergence of "strong upward pressure on world energy and commodity prices", said Mr Sentence.

If such pressures dramatically altered the inflation outlook, the MPC might be forced to reverse its monetary stimulus sooner than expected. Raising rates and reversing QE would have depressing effects on the economy as a whole, when recovery is far from secure. The UK is the slowest growing of the G7 nations.

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