September 16, 2011

Vince Cable supports fresh round of QE

by Kay Mitchell

Business Secretary Vince Cable has today said the Bank of England should consider a fresh round of quantitative easing (QE) to stimulate the economy.

A recent slew of weak data has also led some analysts to believe that the central bank will consider further QE – also known as printing money.

In a pamphlet published before the Liberal Democrats’ annual party conference starting tomorrow, Mr Cable wrote: “We cannot and will not allow the economy to fall into a trap of stagnation.”

He continued: “Where action is needed to sustain demand, and it currently appears to be, the best instrument available is the expansion of money supply through QE – though conditions may call for the use of more creative mechanisms designed to stimulate private credit.”

The bank completed its first round of QE in February 2010, after buying £200 billion of assets – mainly Government bonds.

One way of boosting the economy is by keeping interest rates low – something which the bank’s Monetary Policy Committee (MPC) elected to do again last week at its rate-setting meeting.

UK interest rates have remained at the historically low level of 0.5% since March 2009 – when the economy was in the midst of recession.

Recent figures show the economy appears to be faltering so it was understood that the central bank is reluctant at this stage to lift interest rates as the recovery is losing momentum.

However, at last week’s meeting, the bank did not announce any fresh new measures with regard to its QE programme but some analysts believe that the MPC may be reluctant to re-introduce the programme with inflation running so high.

Furthermore, it is not evident whether purchasing Government bonds would be successful as yields on most securities are hovering at all-time lows.

So far, just one of the policymakers (Adam Posen) has voted for further asset purchases.

While further QE is the central bank’s call, pressure is mounting on the Coalition Government to find a way to stimulate the economy.

Despite calls to review its austerity measures – which many believe is threatening growth – the Government said it will stick with its programme in order to bring the budget deficit down.

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