QE is not a panacea for weak lending, warns Mervyn King
Stephen Foley is a former Associate Business Editor of The Independent, based in New York. He left in August 2012. In a decade at the paper, he covered personal finance, the UK stock market and the pharmaceuticals industry, and had also been the Business section's share tipster. Between arriving with three suitcases in Manhattan in January 2006 and his departure, he witnessed and reported on a great economic boom turning spectacularly to bust. In March 2009, he was named Business and Finance Journalist of the Year at the British Press Awards.
Wednesday 26 October 2011
The Bank of England's £75bn round of quantitative easing (QE) is no panacea for weak bank lending to the real economy, and nor is the Government's plan for credit easing, the Bank's Governor, Sir Mervyn King, has warned MPs.
In an appearance before the Treasury Select Committee, Sir Mervyn dampened expectations of a quick fix to the UK's economic ills, but he said the Bank's QE programme would prevent lending from falling as fast as it might otherwise have done. His testimony came as new figures showed households hoarding cash again, and mortgage lending remaining weak.
"I think the action will make a difference to the amount of lending," Sir Mervyn said of QE. Under the scheme, the Bank will use £75bn of new money to buy government debt, with the aim of driving down interest rates. "It certainly doesn't guarantee that lending to the real economy is positive," he said. "What I do believe is that it won't fall as far as it might otherwise have done."
Sir Mervyn said he did not believe it was the Bank's place to directly support lending to any particular sector of the economy, and punted that to the Treasury, which is drawing up its own plans to encourage banks to support small and medium-sized enterprises (SMEs). Mooted programmes include securitisation of small business loans – that is, parcelling them up for sale to investors, perhaps with a government guarantee.
But Sir Mervyn expressed scepticism that investors would back the securitisation plan in sufficient numbers. "Only the banks and people close to the individual SME know what the credit risk is," he said. "If you want to do anything effective quickly, only the banking infrastructure itself is capable of assessing credit risk."
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