SENIOR official Martin Weale launched a valiant defence of the Bank of England’s latest dose of quantitative easing yesterday, arguing that the move would not push up inflation without helping growth.
Yet the Bank’s former leading hawk, Andrew Sentance, attacked the move dubbed QE2, and said the institution’s credibility was at risk.
“One of the reasons we’ve had higher inflation here in the UK than in other countries is the weakness of the pound,” Sentance said. “One of the impacts of QE could be to push the pound down further and make that problem worse,” he told Sky News.
“QE doesn’t address the problems we currently face: it doesn’t solve the problems in the euro area, and it’s not going to address the problems of confidence among consumers and businesses either,” Sentance said.
“One of the factors squeezing consumer growth is that consumers are having to pay more for a lot of things and therefore they cannot increase their spending very readily.”
Consumer price inflation is currently running at 4.5 per cent, over double the Bank of England’s target.
“The Bank does have an inflation target and it’s meant to be focusing on getting inflation down to two per cent – and frankly, the Bank hasn’t done a very good job of that,” Sentance said.
The think tank Centre Forum – which supports QE2 – also weighed into the debate, claiming that the asset-purchases could “help government finances by inflating away ten per cent of total government debt.”
Bank of England research has estimated that the first phase of quantitative easing -- worth £200bn -- increased inflation “by between 0.75 to 1.5 percentage points” on the consumer price index. Growth was bolstered by 1.5 per cent to two per cent, the Bank expects.
“The work that the Bank has done on the issue has suggested quantitative easing does support the economy,” Martin Weale said yesterday.
Weale, who had voted for tighter monetary policy until August, said the economy would have been weaker without the first phase of QE.
“There is uncertainty about the exact impact and we don’t know if the impact in the future will be similar to what we think it was in the past,” Weale said. “But I have not heard anyone suggesting that QE actually inhibits the growth of the economy, that it fails to provide support.”