The Bank of England today published a paper looking at the impact of QE. The paper finds that QE had an economically significant effect, and
“may have raised the level of real GDP by 1½ to 2% and increased inflation by ¾ to 1½ percentage points … equivalent to a 150 to 300 basis point cut in the Bank Rate”
There has already been some debate about these figures, and the authors point out that there are large uncertainties even with the range quoted, but nonetheless they provide a fair amount of ammunition for those who are arguing for more QE.
One of these people is Vince Cable. As he said in his conference speech today:
“A lot of responsibility rests on the Bank of England to relax monetary policy further linked to small business lending”
While there are certainly ways that loose monetary policy does help businesses, it is not entirely clear that policy needs to be any looser than it already is. As far as improving lending to business there are two key reasons why additionally QE may not help:
Firstly, the Bank's report makes clear that, even with the first round of QE, “the MPC expected little [economic] impact” through the channel of increased bank lending, due to other strains in the financial system. The continued tighter conditions in the financial system are indicated by many factors outside headline rates on lending. Tighter terms and conditions such as stricter covenants in lending agreements and attempts to move companies to more security-heavy forms of lending are discouraging some companies from even approaching their bank to ask for loans.
Secondly, although QE – through reducing the interest rate on gilts – can increase the attractiveness of capital markets to investors, it is not altogether clear that this benefits smaller firms, many of whose owners will be reluctant to use capital market funding which requires them to give up equity.
It will therefore take more than QE to improve the flow of lending to small businesses (discounting, perhaps, some of Adam Posen's more creative suggestions made last week).
Cable rightly said in today's speech he wants to see an end to ‘feast and famine' in bank lending to SMEs. A key step towards this would be an indication of how the government will act in response to the ICB's recommendations on enhancing competition in the banking sector.
More competition in our banking sector would put downwards pressure on the costs of finance faced by SMEs – critical when we consider other forces simultaneously providing upward pressure.
This is just one example of the more vigorous reform agenda we would like to see the government pursue, as a necessary corollary to a credible fiscal consolidation plan. The government must show it is committed to a relentless programme of dismantling the most important barriers to growth.