Tuesday, January 20, 2009
King prepares for quantitative easing
Posted by David Smith at 09:00 PM
Category: Thoughts and responses

Following Monday's banking package, Mervyn King gave a major speech on the economy in Nottingham on Tuesday night, There is a touch of the Donald Rumsfeld about some of the Bank governor's comments: he refers to "conventional unconventional" as well as "unconventional unconventional" measures, but the message of his speech is that the Bank is readying itself for these, not immediately but soon.

This is one key passage: "The disruption to the banking system has impaired the effectiveness of our conventional interest rate instrument. And with Bank Rate already at its lowest level in the Bank’s history, it is sensible for the MPC to prepare for the possibility – and I stress that we are not there yet – that it may need to move beyond the conventional instrument of Bank Rate and consider a range of unconventional measures. They would take the form of purchases by the Bank of England of a range of financial assets in order to expand the amount of reserves held by commercial banks and to increase the availability of credit to companies. That should encourage the banking system to expand the supply of broad money by lending to the private sector and also help companies to raise finance from capital markets."

King's view of the economy, and inflation, is downbeat, at least for the first half of the year. But he remains confident that policy action will work: "No one can know at what point the impact of all this stimulus will have a visible effect on activity; the lags in economic policy are notoriously long and unpredictable. But well-designed policies implemented within a consistent policy framework will eventually work." The speech is here