Quantitative easing is a tool of the independent Monetary Policy Committee and has been designed to work through channels other than the impaired banking system by stimulating activity in capital markets. The Government and the Bank of England are working together on a new funding for lending scheme that will more broadly support sustained and increased bank lending to the economy. I can confirm for the first time that in the three months since the start of the national loan guarantee scheme, over 10,000 cheaper loans worth over £1.5 billion have been offered to businesses. I can also confirm that we have today secured EU state aid approval to extend the scheme to medium-sized businesses with a turnover of up to £250 million. That means 99.9% of UK businesses can now benefit.
Quantitative easing was certainly intended to stimulate the economy, but in reality it is being used to write off the debts of reckless banks with hundreds of billions of pounds’ worth of virtual money. Has anyone in Government thought through the consequences of this policy, and if so, what are they?
The Bank of England conducted a study of the first round of QE that it undertook under the last Government, and estimated that it had increased real GDP by between 1.5% and 2%. The Bank’s chief economist says that the asset programme regime
“was explicitly designed to go around the banking system”.
I therefore do not accept the hon. Lady’s characterisation.
Now that the Bank of England has finally shown more willingness to provide some liquidity support, there should be no obstacle to the exercising of more flexibility by the Financial Services Authority when it comes to how the liquidity buffers are used. That is being desperately demanded by banks. Does my right hon. Friend agree that the FSA should take action as soon as possible, and that such action is what is required to provide borrowing and lending at reasonable rates for the hundreds and thousands of businesses throughout the country that need it so desperately?
The liquidity auction undertaken by the Bank of England last week was very welcome, and the Bank is proposing future auctions. My hon. Friend, who chairs the Treasury Committee, has been prescient in pointing to some of the procyclical nature—if unintended—of some of the liquidity regulation in the United Kingdom in recent years. The Financial Policy Committee was set up to look at risks on both the downside and the upside. The Financial Services Authority must make its own independent decisions, but I am sure that it will have paid close attention to my speech and to the speech of the Governor of the Bank of England at the Mansion House.
Notwithstanding the Chancellor’s warm words about the impact of quantitative easing, I have yet to meet a banker, a businessman or indeed a Government representative who can identify the benefits that have accrued as a result of its introduction. While I do not necessarily oppose it, all the evidence that I am being given by bankers suggests that lack of demand is causing the main problem. Will the Chancellor do something to stimulate consumer demand and investment confidence in order to maximise the potential that quantitative easing might bring?
In conducting its most recent assessment of the UK economy, the IMF explicitly looked at unconventional monetary policy tools that are currently being used, and concluded that quantitative easing was having a positive impact. I think that we should welcome that. I believe that we are able to pursue loose monetary policy—that we are able to use all the tools that are available to us on the monetary policy side—precisely because we have international credibility on the fiscal side.
21. I, too, warmly welcome the action of the Bank of England last week to increase liquidity in its liquidity auction, but should not the role of the Financial Policy Committee be not only to stand against procyclical financial policy and liquidity buffers, but to lean against the wind and make sure that we can get the lending to businesses in our constituencies? (113599)
The Government established the Financial Policy Committee because under the previous tripartite regime, designed and implemented by the shadow Chancellor, absolutely no one was paying attention to overall levels of debt and credit in the economy. That is why we had such a deep recession, and why we went from such a large boom to such a big bust—to coin a phrase. My hon. Friend is entirely right: the FPC should be symmetrical in the way in which it looks at risks. We have made that clear, and we are amending the Financial Services Bill in the House of Lords to ensure that that the FPC has, as a secondary objective, due regard for the Government’s broader economic policy.
Yesterday the Financial Times reported that the Bank for International Settlements was warning of the dangers for economies that get hooked on ultra-low interest rates. Is not the reality that monetary policy alone will not kick-start the sustained recovery, and that fiscal intervention will be needed if we are to avoid a lost decade?
The very low interest and mortgage rates in Britain are extremely welcome to families and businesses across the country. If we want to know what the alternative looks like, we just have to look across the channel at countries that have not been able to maintain their credibility in international markets, where we see rising bank lending and funding costs and increased costs for Government borrowing. We have now five countries in the eurozone who have had to apply for bail-outs. It is because we have fiscal credibility despite inheriting the largest budget deficit in the European Union that we have been able to keep our interest rates very low.
The funding for lending scheme, which the Governor and I announced at the Mansion House, is explicitly designed to address the high bank funding costs and it is tied to lending into the UK economy, so that is precisely what this new scheme is designed to do.