By Marcus Leach
The decision by the Bank of England's Monetary Policy Committee (MPC) today (Thursday) to maintain the current interest rate and level of quantitive easing was the right one, according to David Kern, Chief Economist at the British Chambers of Commerce.
In their first meeting of the new year the MPC resisted any temptation to change the interest rate, which remains at 0.5%, whilst QE is held at £375 billion.
David Kern said not only was their decision widely expected, but it was the correct one.
“The MPC’s decision to maintain QE at £375bn and hold interest rates at 0.5% was widely expected and in our view, correct," he said.
"Our members do not support some of the current gloom about the economy, despite of the possibility that GDP growth will slow sharply in Q4 2012. Given these circumstances, we believe that pressures for more QE should be resisted.
“Adding to QE should only be considered if new threats emerge to the stability of the UK banking system. We believe that further QE would provide only marginal benefits for the real economy, while heightening longer-term risks of financial distortions, bubbles and higher inflation.
“Instead, the MPC should use the existing QE programme more effectively to support a revival in business lending. If the MPC agreed to use QE to purchase private assets other than gilts, such as securitised SME loans, banks would be less risk-averse in lending to businesses. Greater efforts must also be made to ensure that the Funding for Lending scheme operates more effectively. On its part, the government must move more resolutely to establish a fully-fledged British Business Bank.”
Andrew Sentance, senior economic adviser, PwC, agreed with Kern, although he did say if the economy was to show signs of recovery both should be reviewed.
"As expected, there was no change from the MPC today, extending the longest period of unchanged interest rates since just after the Second World War," he said.
"It now seems likely that policy will remain on hold until the summer, when the new Governor, Mark Carney, takes over at the Bank. But if the UK and the global economy pick up this year as we expect, there should be a renewed debate on how to manage the exit from the emergency monetary policy settings put in place following the financial crisis."
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