Cable backs further QE to boost demand

LONDON Fri Sep 16, 2011 12:05am BST

Business Secretary Vince Cable speaks during a China-Britain British Council Banquet at the Royal Courts of Justice, in central London January 11, 2011. REUTERS/Ben Stansall/Pool

Business Secretary Vince Cable speaks during a China-Britain British Council Banquet at the Royal Courts of Justice, in central London January 11, 2011.

Credit: Reuters/Ben Stansall/Pool

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LONDON (Reuters) - The Bank of England should be ready to reopen its programme of quantitative easing to prevent weak demand threatening Britain's fragile recovery, Business Secretary Vince Cable said on Friday.

"We cannot and will not allow the economy to fall into a trap of stagnation," Cable said in a pamphlet for the CentreForum think tank outlining proposals to foster sustainable growth in Britain.

Economists increasingly expect the Bank to restart its bond-buying programme as the economy remains weak - it has barely grown since last September - and after keeping interest rates at record low of 0.5 percent for the 30th straight month last week.

Cable highlighted the use of further quantitative easing (QE) in a list of five broad initiatives that could be taken to restore business and consumer demand, while maintaining the government's tight fiscal plans to reduce a record deficit.

"Where action is needed to sustain demand, and it currently appears to be, the best instrument available is the expansion of money supply through QE - though conditions may call for the use of more creative mechanisms designed to stimulate private credit," Cable said.

The Bank completed its first round of quantitative easing in February 2010, after buying 200 billion pounds of assets, mainly government bonds.

A decision on further QE would be taken by the Bank of England's Monetary Policy Committee (MPC) and is not the government's call. However, Cable's words could add to pressure on the MPC to do more to support the economy.

So far only one of the central bank's nine MPC members - dove Adam Posen - has called publicly for further asset purchases.

Cable, who has a background as an economist, rejected concerns that further quantitative easing would have little effect on demand and dismissed as "overdone" fears that it could stoke inflation, already running at more than double the central bank's 2 percent target.

"(QE) does appear in the light of recent experience to work and to be quick acting," said.

"The excess inflation over target is explained by import prices and one-off tax increases and there is little sign of indigenous wage inflation which is below pre-crisis levels," he added.

Pressure is growing on the coalition government to find a way to deliver a promised private sector-driven recovery at a time when lending conditions are constrained and interest rates are already close to zero.

It has brushed aside calls to change its austerity drive but said this week it would support dozens of major infrastructure projects to support growth.

(Reporting by Tim Castle; editing by Ron Askew)

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Comments (1)
Marylyn wrote:
I sense panic setting in. QE won’t suddenly produce 2 million jobs so where’s this demand coming from? Wages haven’t kept up with inflation (and are hardly likely to in a time of high unemployment. And no one in their right mind would take out a mortgage knowing the rates will have to go up fairly sharply and with the prospect of job loss.

And it strikes me as the very last thing we want with the average inflation expectation for the next 12 months over 4%. It could be a disaster all round if it doesn’t work and it’ll probably wreck people’s savings even more.

Sep 15, 2011 1:33am BST  --  Report as abuse
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