The Conservative Economic Affairs Committee intends to take up the issues of falling money supply and difficulty in small and medium sized companies getting loans to expand and to finance their businesses.
Various commentators assume monetary policy is loose, owing to low official interest rates. The impact of the quantitative easing is now well behind us, and the devaluation which accompanied it. That policy helped the public sector borrow cheaply, but did not help many private enterprise companies who still had to pay much higher rates of interest if they could get credit at all. It also intensified the private sector squeeze by lifting the inflation rate. Now we are back with falling money and inadequate credit.
Interest rates are no longer doing much for money policy. Official rates are as low as they can go, whilst effective rates for the private sector are considerably higher. This reflects the credit rationing, brought about by bank regulation and the demand for banks to hold a lot more capital for any given volume of lending. Some banks find it easier to adjust their balance sheets by running down the loan book, than by raising new capital or generating sufficient profit to build up the reserves.
The Committee intends to raise the issue of bank regulation with the Bank of England and with the FSA. Counter cyclical regulation should mean demanding much more cash and capital of banks when there is too much credit and money around, as in 2006-7, but being less severe when there is little, as today. The current inflation owes much to weak sterling based on substantial quantitative easing some time ago. Current money policy is far from inflationary, and is one of the constraints on a stronger private sector led recovery.