MPC MUST LOOK BEYOND QE
August 2 2012.


Commenting on today's Monetary Policy Committee (MPC) decision, David Kern, Chief Economist at the British Chambers of Commerce (BCC), said: "The MPC's decision to maintain QE at £375bn, and hold interest rates at 0.5% is no surprise. Following last month's move to raise QE from £325bn to £375bn, the MPC is unlikely to make further policy changes until it implements the increased asset purchases. While demands for more QE may increase if weak growth continues, we believe more QE would be a risky and unwise move.

"Since QE offers marginal benefits to the real economy, it should not be used to prevent inflation from falling below 2% in 2013. A temporary fall in inflation below the target would be positive since it would underpin real incomes and support demand, at a time when the fiscal plan and eurozone problems continue to dampen UK growth prospects. To support growth, and help overcome the obstacles to a revival in business lending, the MPC and the government should rely more on tools other than QE.

"If the MPC agrees to purchase assets other than gilts, notably securitised SME loans, banks would be less risk averse in lending to businesses. In addition, the MPC could also consider introducing a reduction in the rate paid by the Bank of England on deposits held by commercial banks. This could discourage hoarding and may provide a useful incentive to increase lending. The creation of a business bank would also provide new and growing companies with the credit they need to start-up and expand."