Today the Monetary Policy Committee met and concluded that it needs to keep the indicative interest rate at 0.5%. Contrary to expectation it did not announce an increase in quantitative easing.
They have been undertaking substantial quantitative easing because bank lending and money supply are not growing as they wish. What a surprise. Over at the FSA they are instructing the banks to hoard the cash being made available, to shrink their balance sheets and control their lending. No wonder the printed money is not yet hitting the High Street.
The interest rate is silly. We need to encourage more saving in the UK. The economy lived for too long on too much debt. In practise banks offer considerably more than 0.5% to depositors if they want to attract deposits. They certainly charge much more than 0.5% if a company or person is able to get a loan from them.
If the MPC wants to get back into the game, it needs to set an interest rate related to what is going on in the makret.
It looks as if the Bank of England has simply become a vehicle to do the government’s bidding. The government just wants to borrow mega billions to carry on spending. As a result it wishes to keep interest rates down for government debt by setting a very low bank rate and by printing money to buy up government bonds. The Bank has become a branch office of a government determined to go out in a blaze of spending and borrowing on a scale never before attempted. The Bank is helping their scorched earth policy.
And where does all that money go that finds its way into the banks from the printing presses? Into government debt of course. That’s the regulators preferred way for the banks to keep the new higher levels of liquidity needed.
It could all look very worrying once the printing stops. If the yield on government debt then rises the banks will have yet more losses to report as a result. Today’s news on quantitative easing is unclear. The MPC has left open the option of doing more later, whilst carrying on with its current programme.
To go back to the driving analogies, they are still driving by looking in the rear view mirror. The MPC have their foot flat to the floor on the accelerator, but the regulators have their foot on brake as well.