Bank of England pumps in extra £50bn but QE failing small firms say critics

By SCOTT REID
Published on Friday 10 February 2012 00:00

CONCERNS were raised yesterday that companies are failing to see much benefit from an easing in credit conditions after the Bank of England voted to inject a further £50 billion into the financial system.

Business leaders broadly welcomed the extension to the central bank’s quantitative easing programme but questioned its effectiveness in boosting lending to struggling SMEs.

Analysts said the Bank was likely to push the button on a further bout of QE before the summer, despite the risks such a move poses to inflation and amid fresh signs of resilience in the economy.

Faced with a fragile recovery and an unresolved eurozone debt crisis, the Bank said it would buy a further £50bn of assets – mostly government bonds – with freshly printed money, taking the total to £325bn.

It also left interest rates at their historic low of 0.5 per cent.

The cash boost, which had been widely expected in the City, will be welcome news for the UK government as it comes under pressure to rein in its austerity measures after the economy shrank at the end of 2011 and unemployment hit its highest level in more than 17 years.

Britain’s recovery from a deep slump during the 2008-9 financial crisis has been weak so far, and the contraction of the economy in the closing months of last year has stoked fears of a so-called “double-dip” recession.

However, recent surveys have pointed to a surprisingly robust start to the new year for both the manufacturing and services sectors. Official data yesterday confirmed that industrial production had rebounded in December from the slump in the previous months.

Liz Cameron, chief executive of the Scottish Chambers of Commerce, said inflationary pressures were receding, giving the Bank of England scope to extend its QE programme. “This has to be the right decision,” she said.

“However, at a more practical level for Scottish businesses, a key issue remains the easing of credit flow and the need for banks to meet their lending targets for small and medium-sized businesses. If necessary, the UK government must step in to support both banks and businesses in meeting these objectives.”

Banks have been under pressure to increase lending to smaller businesses, in particular, under an agreement with the coalition government called Project Merlin. Year-end figures for the scheme, due on Monday, are expected to paint a mixed picture of success.

Earlier this week, Ernst & Young’s Item Club warned that overall bank lending was set to shrink this year for the first time since 2009.

Howard Archer, chief UK economist at IHS Global Insight, the forecasting group, said it was “far from certain” that January’s pick up in economic activity could be sustained, with relapses remaining “a very real risk”.

“Businesses are scaling back investment plans in an uncertain and worrying environment, weakened global growth is a threat to exports, money supply is worryingly weak and credit conditions could well tighten appreciably,” he added.

Archer predicted another £50bn burst of QE in May.

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Jacquie Macdonald

Friday, February 10, 2012 at 03:22 PM

Why do journalists always ask the gloom merchant, Howard Archer, Chief UK economist at IHS Global Insight to constantly comment on the economy? He is the most negative person I have ever encountered, he is oft quoted in papers, always making entirely negative comments. He is also not correct in his constant gloom and doom. I believe he said the UK property market would come down 10% in value in 2011. Typically negative and incorrect. Is there no other more constructive commentators out there? Please Scott Reid, get someone with at least something more hopeful to say. Jacquie Macdonald

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