BoE Governor: QE may not boost lending

| October 25, 2011

Mervyn King, the Bank of England’s Governor, has confessed that the latest round of stimulus is not guaranteed to boost lending to SMEs.

The ongoing lack of credit to SMEs has been a major concern for the Government as these companies are the key to job creation in the UK and are expected to be one of the main drivers of the economic recovery.

Earlier this month, the Bank of England announced it would restart its quantitative easing (QE) programme – a scheme designed to stimulate the economy.

A recent slew of weak economic data had led to speculation that the central bank would embark on its “QE2” programme to boost the economy.

The Bank recently pumped a further £75 billion via its QE scheme after injecting £200 billion into the economy in November 2009 in an attempt to boost lending by banks.

QE, also known as printing money, is a process used for buying Government bonds or other financial assets.

However, Mr King has today told the Treasury Select Committee that banks are under pressure from investors to reduce their loan books and that the extra £75 billion may only prevent banks from reducing lending even further.

He said: “I can’t guarantee that it means that bank lending will rise. But I do believe that it won’t fall as far as it might otherwise have done.”

He added: “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.”

Meanwhile, many have suggested the latest QE boost could drive inflation up further – which is already running at 5.2% - a 3-year high.

However, Mr King denied this but acknowledged that families are facing a “real squeeze” on their income.

Finally, Mr King was subject to some criticism for not re-introducing QE months ago but he said the Committee believed developments in the euro zone and the global economy meant “we do what we feel is appropriate at the time.”

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