Posted by

Steve Hughes, Senior Economic Adviser

10 May 2012

This is a potted history of the decisions that brought us to the point at which we are now at, and it is worth summarising the issues that the Bank faces in determining monetary policy: Firstly, the official numbers show that the Bank is still well above its 2% inflation target (which has been put down to factors largely beyond its control, such as imported inflation and tax rises), and economic growth has flat-lined; secondly, there are an increasing number of critics of the QE programme (including hard campaigning by the National Association of Pension Funds), and question marks over how it will be unwound; and, thirdly (and possibly stating the obvious), monetary policy is being set in an extremely volatile economic environment (with the most recent examples being the fallout from the Greek and French elections, and the nationalisation of a bank in Spain).

Given this, there is also a debate of what more (if anything) the BoE can actively do. David Kern, the BCC’s Chief Economist, has suggested that the QE programme could be used to purchase more private sector assets, such as securitised SME loans which may generate a greater risk appetite for banks to lend to businesses. In his most recent speech, the Governor of the Bank of England gave no indication that any kind of shift beyond what we know now as QE would happen, instead focusing on the Bank’s new responsibilities of financial regulation, creating a good framework for resolving bank failures, and restructuring the banking system to make it safer. Whatever happens, the scrutiny facing the BoE is likely to get more, rather than less, acute over the coming months.