Comment: King’s conversion may trigger other weapons

Terry Murden. Picture: TSPL
Terry Murden. Picture: TSPL
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Bank of England governor Sir Mervyn King fired a surprise salvo in the battle to get the economy moving.

His decision at the last meeting of the monetary policy committee (MPC) to vote for more quantitative easing (QE), alongside fellow members David Miles and Paul Fisher, was puzzling in the light of recent data suggesting the economy should avoid a triple-dip recession.

For the previous six meetings King favoured keeping further asset purchases on hold and the reason for his conversion was not immediately apparent. But the governor and his two supporters clearly believe there is more that the Bank of England can and should do, and the threesome were prepared to risk yet more upward pressure on inflation and downward on the pound by taking whatever action is deemed necessary to stimulate economic activity.

The Bank has already admitted that inflation will in any case be above trend this year, but together with a greater drive on growth the mood now hints at a more flexible 
approach, along the lines favoured by incoming governor Mark Carney. It is 
notable that the MPC discussed a range of other policy tools, including a cut to the already record low interest rate and the purchase of assets other than gilts.

For the MPC to be divided now and, if precedent is any indicator, to be heading for a vote in favour of more QE in the spring, tells us that the economy will remain stubbornly flat and going nowhere without further stimulus.

It may also tell us that the Funding For Lending Scheme launched last 
August, and which made £80 billion of cheap money available to lenders, has not fulfilled the hopes of its 
architects, in spite of the MPC minutes indicating that it is performing in line with expectations.

While evidence thus far says more money is finding its way to business borrowers, the recipients tend to be bigger companies and the scheme is perhaps not powerful enough on its own to provide the liquidity the economy needs.

Hence, the discussion among members about those other policy tools which we may begin to hear more about.

Lee’s dividend cut looks brutal for RSA shares

A SECOND surprise of the day came from insurance company RSA which announced it was cutting its dividend by a third and said it would also cut next year’s interim payout, apparently to finance growth in emerging markets.

Investors wondered why it was necessary to deny them £100 million in returns when the money could have been borrowed cheaply on the market. Chief executive Simon Lee has gambled on maintaining a strong balance sheet and even after this cut the dividend will produce a healthy yield. But it does look brutal and is a risky move that weakens one good reason for buying the shares.

Firms find 4G a tech change they can ignore

The pace of technological change is such that no sooner has one system bedded down than another is announced to take its place. But companies are sceptical about the gains to be made on what are often marginal improvements in performance.

It’s not surprising, therefore, that on the day the 4G mobile licences were sold for less than expected it is revealed only 4 per cent of small firms are willing to invest in it.