Monday, 1 July 2013

Carney could rescue UK monetary policy but not with more stimulus

By Patrick Minford (30 May 2013)

Mark Carney will arrive as the new governor of the Bank of England at a time when its policy is in disarray, but also when all the levers are in the Bank’s hands. He has a good chance to improve matters.

But what is the problem? The Bank is pursuing its loosest monetary policy of all time. The money it has “printed” via quantitative easing (QE) – the stuff that either is or can immediately be converted into notes in circulation, the “monetary base” – has expanded to eight times its 2007 value. That’s not a misprint; it has expanded by 700 per cent.

Virtually all that expansion is sitting in bank reserves – deposited and not lent. The banking system has created no additional money, and the total (“broad”) money supply has barely grown. Meanwhile, interest rates on government three-month bonds are held down close to the Bank Rate of 0.5 per cent, an all-time low that has prevailed for four years; on longer maturities, the government can borrow at rates below inflation. Yet rates on credit to small businesses remain, as far as we can measure them, stratospheric. SME lending continues to contract sharply.

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