As widely predicted and agreed by us, the MPC have maintained the interest rates not unsurprisingly at 0.5%. What they have done, again as we expected, is to increase the quantitative easing programme by another Â£25 Bn over the next 3 months. But where will the money end up?
They have decided to keep the base rate unchanged in order to ‘keep inflation on track to meet the 2% inflation target’. The reasons the BoE cite for their QE decision is that UK output has fallen by 6% over the last 2 years or so, GDP has fallen again in the third quarter this year, household spending is reducing as is business investment.
They temper this by saying that previous QE is working its way through the system and that this should start to show returns shortly.
Just after the meeting the MPC and Chancellor swapped the usual pre-prepared letters, one asking for the increase in QE, the other authorising it.
Interestingly though, the BoE letter states that “…the need for banks to continue the process of balance sheet repair is likely to limit the availability of credit. And high levels of debt will weigh on spending. On balance, the Committee believes that the prospect is for a slow recovery in the level of economic activity……. “
More interestingly the Chancellor's letter states near the end that "In my letter of 29 January, I wrote that the objective of the Asset Purchase Facility is to increase the availability of corporate credit……….I would welcome an update on the prospective use of the secured commercial paper facility."
One letter (BoE) seems to indicate that QE might be used to shore up banks’ balance sheets, the other (Darling’s) that corporate credit should flow and he wants to have an explanation of what it will be used for.
Is this just not a paperwork covering of backsides? Should this not be questioned a little more deeply?
Taxpayers’ money being issued by the government for one reason but being used for another reason, almost it seems, with the government’s blessing. Not only that there is a lot of this money ending up in the equity markets. They, the BoE and Treasury need to come clean on this.