By Max Clarke

The Bank of England should ‘seriously consider’ increasing the size of its asset purchase programme from £200 billion in a last ditch attempt to kick start the UK recovery.

The Bank of England’s purchase of other banks’ assets by effectively using created money, also referred to as quantitative easing, is a fiscally controversial policy owing to its tendency to increase inflation. Currently the Bank of England’s Monetary Policy Committee is facing pressure to increase the base rate of interest in a bid to stem inflation, which runs at more than twice the Committee’s target rate.

But increasing the interest rate would stifle the UK recovery, argues the British Chambers of Commerce’s Chief Economist, David Kern, causing more damage than inflation would.

Continues Kern: “The current economic environment supports the case for maintaining interest rates at their current low level until at least the fourth quarter of 2011. Economic growth remains weak and there are worrying signs around the strength of the manufacturing recovery.

“The government’s tough austerity plan is intensifying pressures on both businesses and consumers. Although inflation will rise further in the short term, this is due to earlier increases in VAT and in energy prices. These factors are outside the MPC’s control, and higher costs will only worsen the squeeze on firms’ cashflow and on disposable incomes.

“Any increase in interest rates in these circumstances would risk triggering a setback. As long as wage pressures remain muted, and there are no signs that the UK is at risk of a wage-spiral, the MPC must hold its nerve. Indeed, if there are signs that our economy is weakening, the MPC should seriously consider increasing the QE programme above its current level of £200bn.”

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