My answer to those who ask should the UK enter another phase of money printing or quantitative easing is a simple “No”.
The £200 billion of the last government’s programme is still in the system. It has caused some inflation, by helping drive the pound down against other currencies. This has led to dearer imports and some dometic price rises. It will lead to more inflation, if the monetary transmission mechanism of the commercial banks is repaired sufficiently.
So far most of the created money has stayed in the public sector. It has not been used by commercial banks to gear up their balance sheets, lending more out to the private sector on the back of the newly created money. They have effectively been forced to buy government debt with it. They have £150 billion deposited with the Bank of England. If the authorities get round to allowing the commercial banks to expand their balance sheets again, the large amounts of narrow or high powered money released into the system would permit a rapid build up of lending and rekindle inflationary pressures domestically.
To date the government has decided to tax the size of a bank’s balance sheet, whilst the banking Regulator has been demanding higher levels of cash and capital.These interventions limit the ability of the banks to multiply the new money through the system. If the authorities want a stronger recovery they will have to allow the banks to lend more. If they do this they need to be careful about the amount of extra money they have created, and stand ready to withdraw some of it as soon as things start to heat up too quickly.