West Midlands business organisations agreed overwhelmingly yesterday that the Bank of England had little choice but to leave its official interest rate at 0.5 per cent option, although opinions differed about the impact of “quantitative easing” so far.
The Bank’s Monetary Policy Committee is believed to have spent much of its two-day meeting discussing whether to speed up or slow down its month-old programme to buy £75 billion worth of Government bonds over three months, effectively with newly printed money.
At the end of the meeting it stated only that it would proceed as planned, without mentioning the possibility of using the second £75 billion authorised by Chancellor Alistair Darling.
The issue was raised by William Rogers, policy adviser at Birmingham Chamber of Commerce and Industry. “Businesses in Birmingham and Solihull are now looking for the Bank of England to give some indication about whether the first stage of its quantitative easing plan to boost the money supply by buying up government assets has had any impression on the domestic economy”, he said.
“It is imperative that the banks increase their lending to businesses and individuals with the cash gained from quantitative easing.
“As monetary policy enters uncharted waters, the authorities must be as transparent as possible about their actions, which is why we are looking for an update on the Bank of England on the economic revival.”
This question of transparency was also raised by David Kern, chief economist at the British Chambers of Commerce. “British business is concerned that in the face of a severe recession, quantitative easing has not been sufficiently effective so far,” he said.
“Quantitative easing must be implemented in a more transparent way. The Bank of England must spell out what rate of expansion in the money supply they are planning to achieve.”
David White at Grant Thornton in Birmingham welcomed the Bank’s pause for breath after six months of unprecedented interventions, to provide some balance and calm in the economy.
“A significant rebound in confidence is still a distant reality,” he added.
“With the Chancellor now conceding that the economy is unlikely to recover until 2010, the main function of the MPC for the rest of the year will be how to implement quantitative easing effectively. The question now will be when to stop printing money. Solving today’s deflation problem may unleash the return of the old-fashioned inflation beast tomorrow.”
Harvey Williams, speaking for the Royal Institution of Chartered Surveyors in the West Midlands, agreed that the no-change decision could offer some short-term financial stability and help bolster confidence.
But he added “What still appears to be needed is further availability of funding to make it easier for home buyers to turn aspirations into transactions as the welfare of the housing market is inextricably linked to the UK economy.”
Louise Bennett, chief executive of the Coventry and Warwickshire Chamber of Commerce, said “The Government and MPC have to be imaginative in searching for ways to get the economy moving again. Quantitative easing is under way, but the Government can do more to remove the burden on business and I hope that the Chancellor’s Budget later this month goes some way to doing that.”
Mark Smith, regional chairman of PricewaterhouseCoopers in the Midlands, commented: “The focus is now on the Bank of England’s £75 billion policy of quantitative easing designed to kick-start the economy. While the theory behind increasing the money supply is sound, opinions are very much divided on how soon it will boost confidence and cause consumer spending to rise. Businesses and households will nevertheless be happy that these measures are being taken, though the positive effects may not be felt until later in 2010 and beyond.”
Peter Mathews, president of the Black Country Chamber of Commerce, commented: “Our own quarterly survey and reports from elsewhere indicate that the economic decline has begun to slow.
“The problems are by no means over yet, but with initiatives put in place over recent months, the G20 measures announced last week and the Budget coming up later this month, we would expect to see all these things coming together and move the UK and global economy forward.
But Deb Leary at the Midlands World Trade Forum pointed out: “Exporters have not benefited as much as we would have liked from the weakening of sterling. With the global economy looking as if it may be starting to bottom out, we hope that we can see some sort of global trading normality starting to show.”
Richard Boot, chairman of the West Midlands Institute of Directors said “The outlook for the economy remains very uncertain as between a mild or brutal recession.
“On the one hand, there are tentative signs that the period of sharpest falls in output may now be behind us, while the weakness of the pound has caused inflation to hold up more than expected.
“In addition there has been a huge fiscal and monetary stimulus which has still to feed through to the economy. Against that, the economy is a considerable way from recovery and the concern is still that the downturn evolves into a balance sheet recession with consumers and companies alike focused entirely on debt minimisation.”
John Houlder at Ernst & Young in Birmingham expects British interest rates to stay at 0.5 per cent for some time, but not to go as low as in the US.
“Now there is little left in the MPC’s locker with interest rates at unprecedented levels, it is up to the Government and the Bank of England to find other ways to stimulate the economy, although with increasing Government borrowing the options look limited.”