By Max Clarke

Hesitation about increasing quantitative easing is based on ‘mistaken beliefs’, Bank of England Monetary Policy Committee member, Adam Posen said in a speech delivered this morning.

Inflation is frequently cited as the biggest barrier to increasing the cash injection into the economy. But Posen notes that the UK’s high rate- at 4.5% on the consumer prices index- is due largely to external factors, and will likely ease below the 2% target within 2 years, if not before.

A sudden increase of the Bank’s asset purchase programme would stimulate lending, propping up the economy until smaller lenders can fill the void. It was this focus on smaller lenders and smaller businesses that Posen argues held the key to the UK recovery. Said he:

“That is why I propose that the Bank of England undertake more QE on a large scale immediately, and that the Bank and HM Government work together to create, capitalize, and make liquid new institutions for lending to new businesses and SMEs. Our current credit allocation problems and resulting investment shortfall is one of the biggest specific barriers to recovery and to sustainable price stability in Britain.

"Monetary policy in the form of more QE will address this shortfall. The Bank of England, however, can and should go further than just doing more QE to remove this barrier to investment and growth in new and smaller businesses. We can do so completely within the bounds of our mission, our legal mandate, and our responsibility to stay out of politics and out of specific investment decisions.”

Adam Posen then extended his plea beyond the reach of the UK, urging central banks across the eurozone and the G7 to intervene, predominately by quantitative easing.

“But the general idea that the current economic situation is critical, and that coordinated monetary and fiscal action could turn the tide in the right direction, applies to all of the G7 economies,” he said.

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