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Be patient as QE is no 'manna from heaven', King says

The Bank of England will not sell its assets or give money back to the government, Mervyn King said, as he answered his critics over quantitative easing.

 
Be patient as QE is no 'manna from heaven', King says

Bank of England governor Mervyn King has said that while printing money is not 'manna from heaven' some of its alternatives are not viable.

During a speech given to the Cardiff Chamber of Commerce, King (pictured) sought to answer some of his critics about the bank's continued use of quantitative easing (QE).

A string of top name fund managers have warned of global central banks' reliance on cheap money. While King said that QE has its uses, he also acknowledged its limitations.

But the Bank governor, due to stand down next year, went on to point out that some of the proposals being put forward are not workable.

'Giving money either to the government or to households directly, or indeed cancelling our holding of gilts, means the Bank of England has no assets to sell when the time comes to tighten monetary policy,' King argued.

He continued: 'When [the] Bank Rate eventually starts to return to a more normal level, as one day it will, the Bank would then have no income, in the form of coupon payments on gilts, to cover the payments of interest on reserves at the Bank of England that we had created.

'The Bank would become insolvent unless it created even more money to finance those interest payments, and that would lead ultimately to uncontrolled inflation. That is a road down which the Bank will not go, and does not need to go. I suspect the advocates of “helicopter money” and related ideas are really talking about a relaxation of fiscal policy. It would be better to be open about that.'

Amid speculation that the Bank of England will extend its existing £375 billion programme when the the monetary policy committee (MPC) meets next month, Kind said the committee would think long and hard about extending its the scheme.

He warned: 'Printing money is not, however, simply manna from heaven. There are no shortcuts to the necessary adjustment in our economy.

'The problems in the world economy mean that we shall have to be patient.'

On Thursday the Office for National Statistics (ONS) will give its update on the state of the economy, and it is expected to announce a rare break from the gloom with the UK exiting the recession during the third quarter.

Retail sales have also picked up, hinting at a tentative recovery in consumer spending.

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4 comments so far. Why not have your say?

snoekie

Oct 24, 2012 at 17:14

"'Printing money is not, however, simply manna from heaven. ", but this is how they have been using this device, and taking us down the Weimar Republic and Zimbabwe route.

Uncomfortable as it will be, there is no other option other than to bite the bullet and scrap any further QE and raise interest rates so that the savers, many of whom are pensioners reliant on the income for their day to day needs, can benefit from the savings they have made at no little inconvenience to themselves by denying themselves frills in the past to provide for their future.

QE will be a blight on all, regardless, in the years to come, but King and his cronies are protected from this by the way they rigged their pensions. Were it otherwise, they wouldn't have embarked on the QE course.

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AA

Oct 24, 2012 at 17:27

Only senible policy is to raise interest rates to a level above inflation.

Housing prices must be allowed to crash if necessary, that would lead to increased economic activity and influx of first time buyers and a huge boost to building sector.

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D Wood

Oct 25, 2012 at 08:01

To Snoekie & AA

I agree printing money endlessly is not good.

But to raise interest rates would hurt the working glass man or business man with a mortgage / loans so much that it would create even more unemployment / bankruptcy.

I think a reduction in interest ratyes still further is best. It will put money in the working mans pocket and the business mans pocket. The working man will spend money and the business man will invest and so stimulate growth.

I sympathise for the pensioners but it was the working class man and businessman that hurt badly when interest rates were at 15% in living memory.

Swings and roundabouts !

Mr M.King tells an untruth about giving people money directly.

Why not lend the small businessman say 5%. They could set up a scheme where they could lend the small businessman money but have them give security so when the bank needs its "war chest" it has it. The problem is the bank of England members have their cushy jobs and have no idea what its like for the small business man. I do think they know this could be done but like politicians they are LAZY !!!!!!!!!!!!!

It involves a bit of work ! so lets just print money and let big business benefit and not let small business access this money. Small business being sole traders.

Glad I got that off my chest. Time for a cup of tea :)

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AA

Oct 25, 2012 at 09:00

Current low interest rates subsidise those who invested in over-priced housing in favour of the careful savers, investors, pensioners, students, in fact the very large majority of people. Most of the mortgage owners are also "buy to let" investors, subsidising them is not only unfair but also the root cause of stagnation in building sector.

15% interest rates did not cause collapse of builduing sector as thiose tdays houses were not over-priced. Unfair, unjust and foolishly low interest rates corrupt the mechanism of capitalist economy to self regulate, maintain over-priced sectors and lead to their stagnation. Not many can afford to buy houses anymore except those who can get cheap credit and use it for buy to let at inflated prices.

Interest rates must at least be 3-4%, with house prices down by at least 30% from current levels before we see the green shoots of recivery.

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