The Bank of England should not deploy another round of quantitative easing (QE), according to John Redwood.
The Conservative MP for Wokingham says QE has so far had some impact on inflation but most of the money is yet to make its way into the wider world.
He says: “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 lead to dearer imports and some domestic price rises.”
Redwood says commercial banks have effectively been forced to buy government bonds with the £200 billion pumped into the economy in the last round of QE with £150 billion worth of bonds deposited with the Bank in exchange for the QE1 cash. (article continues below)
He says the government’s decision to tax the size of a bank’s balance sheet and regulators seeking higher capital reserves limit the banks’ ability to release that £150 billion into the financial system.
He adds: “If the authorities get around 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.”
At an International Monetary Fund (IMF) meeting in Washington last week, Chancellor George Osborne indicated that he would not stand in the way of further QE if the Bank calls for it. He said: “I regard the Bank’s monetary policy committee as independent. If it makes a judgment I would want to follow that judgment.
Redwood adds: “If the authorities want a stronger recovery they will have to allow the banks to lend more. If they do this they will 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.”