Mervyn King, the Governor of the Bank of England, has admitted that the decision to pump more money into the British economy does not – and cannot – guarantee an increase in lending by commercial banks in this country.
His frank admission, which was pounced on by critics of the policy as embarrassing, was made when he gave evidence about the Bank’s programme of quantitative easing to the Treasury Select Committee.
Earlier this month, the Bank of England injected a further £75 billion into the economy in a desperate bid to bolster the fading recovery and prevent Britain falling into a politically unacceptable “double dip” recession.
Mr King told MPs he thought lending had not fallen as fast as it would have done, had the Bank not taken action, and he denied that the Bank waited too long before making its move.
The Bank of England pumped £200 billion into the economy in an attempt to kick-start a recovery in 2009 by buying assets such as government bonds. The hope was this would persuade banks to boost lending to business. It agreed to expand the QE programme to £275 billion at its last meeting.
Mr King said: “I can’t guarantee it means that bank lending will rise, but what I do believe is that it won’t fall as far as it might otherwise have done. I think the action will make a difference to the amount of lending, but it certainly doesn’t guarantee that lending to the real economy is positive.
“Only the banks are in a position to assess credit risks for SMEs [small and medium-size enterprises]. What we have to do is to find ways of giving incentives to the existing banks in order to lend more.”
He said it was up to the government to create such incentives, not the central bank.
“The Treasury are perfectly capable of organising a scheme which provides incentives for banks themselves to decide which companies to lend to and which not, but in which it’s possible for the Treasury to shift the incentives so that the banks choose to do more of it.”
Asked why the Bank did not choose to increase its QE programme sooner, he said the change in outlook for the euro and the world economy had made the biggest difference.
“I don’t think the scale and the immediacy of how the problem deteriorated in the euro area was obvious at the beginning of the summer.”
Mr King acknowledged that households were facing a “real squeeze” on their income, but denied that the QE programme would increase inflation, currently at 5.2 per cent on the Consumer Prices Index measure. The Monetary Policy Committee, he said, had unanimously made their decision because they feared that inflation in the longer term was in danger of dropping below its 2 per cent target.
