“The aim of the measures to be introduced over the next few days is to create a year or possibly two years’ breathing space,” he told the Treasury select committee. “The underlying problems still have to be resolved.”
Sir Mervyn pointed to the deteriorating situation in the Eurozone, and its impact on the UK economy, as the core reason for the second round of quantitative easing (QE2) being introduced earlier this month.
MPs were keen to discuss support for small businesses.
“SMEs are getting no bank lending but are suffering from the effects of high inflation,” said Stewart Hosie MP, challenging the success of QE.
“Any action to raise the level of demand helps SMEs,” countered King.
He also poured cold water on the idea that the government could set up a new bank to lend to SMEs. “Only existing banks have the infrastructure and experience in judging credit risk – the Treasury does not, I do not.”
If a new bank was to be set up, “given the way our bureaucracy works, I would be surprised to see any action from a new lender within 18 months.”
Banks need incentives to lend to SMEs, he said, which could mean either fiscal action or using the two major banks currently owned by the government to achieve those ends.
MERVYN KING | WHAT HE SAID TO THE TREASURY SELECT COMMITTEE
• “I don't think the scale of how the problem deteriorated in the Eurozone was obvious at the start of the summer.”
• QE1 boosted the economy and QE2 is needed to prevent inflation from falling below two per cent in 18 months’ time.
• “Only banks are in a position to assess credit risks for SMEs,” he said, adding that the government owns several.
• “I can't guarantee QE2 means bank lending will rise, but I do believe that it won't fall as far as it might otherwise.”
• “Lending ratios have already come down from 40 times to 20 times, with further to fall,” he said, as markets are pressuring banks to up their capital.
• “We are not at all happy that CPI inflation is at 5.2 per cent,” he said, but the committee would give him “a very hard time” if inflation fell below target.