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QE: welcome but more needs to be done

From Duncan Weldon's Touchstone blog

The Bank of England, as was widely expected, is launching another round of QE in an effort to stimulate the economy.

On a day when industrial production and the trade deficit provided some good economic news, the Bank notes that:
 

Some recent business surveys have painted a more positive picture and asset prices have risen. But the pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries. A gradual strengthening of output growth later this year should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy. But the drag from tight credit conditions and the fiscal consolidation together present a headwind. The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist.
 

The Bank is therefore hopeful that falling inflation will provide a boost to incomes and consumption but worried about the prospects for continued growth through exports and the ‘head winds’ of ‘fiscal consolidation’ and ‘tight credit conditions’.

Whilst there isn’t much that the Bank can do about the Government’s fiscal policy, there may be more it can do to help alleviate tight credit conditions.

As last week’s money and lending showed, the UK appears to be caught in a second credit crunch. Lending to non-financial firms is falling and the money supply numbers look extremely weak.

Against the backdrop of an existing QE programme of £275bn these numbers are especially concerning.

Last week, the TUC published a report on how the banking sector is currently failing to support the real economy.  MPC member Adam Posen, speaking at a TUC seminar, called for more active policies to support SME lending and ensure that credit flows into productive business.

Whilst the TUC welcomes that the Bank is taking active steps to support demand, we worry that QE, in its current form, won’t be enough to get the economy moving strongly again.

The Government has been talking about ‘credit easing’ for almost six months now but with little action whilst Project Merlin has come and gone (to seemingly little effect), it’s time for the Government to get serious on this agenda.

Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.

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