Mervyn King: QE will not guarantee rise in bank lending

Mervyn King: "I can't guarantee that it means that bank lending will rise"

Bank of England governor Mervyn King has admitted that the central bank's pumping more money into the economy will not guarantee an increase in lending by commercial banks.

Earlier this month, the Bank injected a further £75bn into the economy in a bid to bolster the UK's recovery.

But Mr King told MPs he thought lending would not fall as fast as it would have done, had no action been taken.

He also denied the Bank had waited too long before acting.

Mr King was giving evidence to the Treasury Committee on the Bank's quantitative easing (QE) programme.

The Bank had already pumped £200bn into the economy in 2009 by buying assets such as government bonds, in an attempt to boost lending by commercial banks.

It agreed to expand the programme to £275bn at its last meeting to aid the fragile recovery.

Incentives for banks

"I can't guarantee that it means that bank lending will rise, but what I do believe is that it won't fall as far as it might otherwise have done," Mr King told the committee.

"I think the action will make a difference to the amount of lending, but it certainly doesn't guarantee that lending to the real economy is positive.

Start Quote

I don't think the scale and the immediacy of how the problem deteriorated in the euro area was obvious at the beginning of the summer”

End Quote Mervyn King Bank of England governor

"Only the banks are in a position to assess credit risks for SMEs [small and medium-sized enterprises]. What we have to do is to find ways of giving incentives to the existing banks in order to lend more."

Mike Parkinson, from the accountants Barnes Roffe, questioned how useful QE would be if it did not enable banks to lend to SMEs.

"What possible benefit can it be to the real economy, to the real world of real jobs supported by local employers, if the Bank of England can't force banks to behave responsibly?" he said.

Mr King said that it was a job for the government to create incentives for lenders, not the central bank.

"The Treasury are perfectly capable of organising a scheme which provides incentives for banks themselves to decide which companies to lend to and which not, but in which it's possible for the Treasury to shift the incentives so that the banks choose to do more of it."

Euro problem

When asked why the Bank did not choose to increase its QE programme months earlier, the governor said the change in the outlook for the euro and the world economy had made the biggest difference.

"I don't think the scale and the immediacy of how the problem deteriorated in the euro area was obvious at the beginning of the summer," he said.

Mr King also acknowledged that households were facing a "real squeeze" on their income, but denied that the QE programme would increase inflation, currently at 5.2% on the Consumer Prices Index measure.

In fact, he said the Monetary Policy Committee (MPC) had unanimously made their decision because they feared that inflation in the longer term was in danger of dropping below its 2% target and they wanted to offset that.

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