Bank's King set to defend QE, leave door open for more

By David Milliken

February 13, 2012 11:42 AM EST

Bank of England Governor Mervyn King looks set to leave the door open for further gilt purchases to boost the economy when he gives a quarterly news conference on Wednesday, but will resist calls to take a more active role in encouraging bank lending.

Last week the Bank's Monetary Policy Committee voted for another 50 billion pounds of quantitative easing over the next 3 months, taking the total to 325 billion pounds, and King's presentation of the Inflation Report should give a signal about whether any more is likely.

But he is will also face questions on the broader issue of whether gilt purchases alone are the best way for the central bank to kickstart faltering growth and contribute to its main target of keeping inflation close to 2 percent.

Calls on the Bank to take steps to encourage] lending more directly got further momentum after commercial banks failed to meet a government target for lending to small businesses.

At a conference on Friday, former MPC member Sushil Wadhwani said there was little doubt that QE had succeeded in lowering government borrowing costs, but that evidence of its benefit to the wider economy was weaker.

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"We are really on very weak ground here. It makes me wonder why we haven't seen more credit easing," he told the event hosted by a British leading economics think tank, NIESR.

Credit easing is an overarching term for policies aimed at loosening the credit conditions attached to corporate and household borrowing, rather than just increasing the quantity of money in the economy, as QE does.

Adam Posen, the most dovish current member of the MPC, has promoted this course, urging the Bank to get involved in buying securitised packages of business and home loans, as well as to support a state investment bank.

However, King has strongly resisted this, saying it is the job of the Treasury to take decisions that could involve credit risk or favouring one business over another.

NO CREDIT EASING

Most economists do not expect King's view to change on Wednesday, and for him to be able to resist this pressure unless the economy deteriorates markedly.

"They should have done more, but they should have done more 18 months ago. Whether now is the time to do that I'm not sure. The economy seems to be moving forward," said BNP Paribas economist David Tinsley.

Britain's economy shrank by 0.2 percent in the last 3 months of 2011, and is still highly vulnerable to any worsening of the debt crisis in the euro zone, its biggest export market.

But after an improvement in business surveys and market confidence at the start of 2012, most analysts reckon Britain will just about avoid entering another recession, and that growth will slowly pick up through the year.

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