The Bank’s remit includes assisting in promoting sensible growth, after ensuring price stability. In 2008 Gross Domestic Product fell by 7%. It recovered a little in 2009-10, but has recently been hovering around zero growth. On current Bank projections it will not be back to the 2007 peak levels until 2014.
The Coalition government forecast better growth in its first plans in the summer of 2010. Since then it has revised these down sharply for the first three years of the period, but reckons with the Bank that growth should be at much better levels in 2014 and 2015.
The Bank’s main way of trying to assist recovery is to inject more money into the economy by creating it and buying government bonds. When it buys a government bond from the private sector, that frees cash for the private sector to spend or invest in something more risky than a government loan. That should, according to the Bank, stimulate more activity.
It has certainly kept down the interest rate on government borrowing. This has been most helpful to the public sector, where additional borrowing remains at high but reducing levels. It allows more of the extra cash spending by government to go on goods and services rather than on additional debt interest.
It has not been so successful in keeping down private sector interest rates. The market in money between banks remains damaged. The leading banks all have to raise more capital or curtail their loans to comply with the much stricter cash and capital rules now in place, and to position themseleves for the even stricter ones coming in later.
The approach of the Bank of England is different from that of the European Central Bank. That has made much more money available to the commercial banks, to stimulate them and their lending capability directly. The Bank of England was keen to avoid lending to businesses through the corporate bond market, doing very little in its first programme of Quantitative Easing, and ruling it out in subsequent programmes.
Some now think the Bank should intervene more firmly in the inter bank markets, to get private sector interest rates down closer to official rates to enforce its will for easier money. Others think the QE programme will in due course prove inflationary, and are concerned about the continuing run of inflation numbers well above target. The Review should ask why GDP has behaved so erratically, why it is now so low, and why it is taking so long to get it back above previous peak levels. The Reviewers need to answer why such a huge QE programme has had so little effect on the private sector. It should ask if banking regulaiton is offsetting much of the QE impact outside the public sector.