September 23rd, 2011
Some are urging the UK’s Monetary Policy Committee to print some more money. Will this help markets?
Remember the deal – the Coalition government was to offer us a tight fiscal policy in return for the Bank offering us looser monetary policy. The government would control excess spending in the public sector, and allow the banks to fuel a private sector led recovery on the back of cheap money.
The latest figures show that the theory is not being implemented that well. Last month the UK government borrowed a record amount for an August – £15.9 billion – up from £ 14 billion a year earlier. Tax revenues were up, so the increased deficit was the result of higher spending. Fiscal policy is not yet tight.
Nor is money policy loose for the private sector. Reports continue of small and medium sized companies finding access to new borrowing difficult. The very low interest rates only apply to the government. All the time we have some weak banks, and banks generally under strong regulatory requirements to increase their cash and capital, we will not have an adequate supply of new lending to fuel the private sector led recovery.
We do not see how another round of creating money to buy up government debt would help much. The government interest rate is already low. It will not of itself unblock credit to SMEs or to the private sector generally.
There is some downside from more QE. The obvious danger is more inflation. The Monetary Policy Committee is meant to keep inflation to 2% on the CPI. They seem to have abandoned all attempts to do that any time soon. Their talk about possibly having another bout of money printing has already triggered a slide in the pound against the dollar.
The current high level of inflation comes from the devaluation of the pound in previous years, and from rising prices in countries that export to the UK.
High UK inflation this year is itself damaging recovery prospects. It is big price rises for energy and other essential items that leave people with too little money to buy the goods and services which would create faster growth. As inflation makes people poorer, so they can afford less tax, which leaves the government unable to afford all its spending. The UK bond market so far has held up well, but the economy is going to be adversely affected by world events. The deficit reduction strategy rests on extra revenues from good growth. We still do not recommend buying the London market. We are running high positions in cash and near cash.