Sir Mervyn King gives £75bn quantative easing the go-ahead
Bank of England governor Mervyn King has said this financial crisis could be the worst the UK has ever seen.
His comments came after the Bank authorised the injection of a further £75bn into the economy through quantitative easing (QE).
“This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever,” he said.
Despite criticising the use of QE in the past, Chancellor George Osborne said it was now the right move to make. The Bank has already pumped £200bn into the economy, under the previous Labour government.
Mr Osborne also said he endorsed Mr King’s view on the severity of the crisis.
The Bank’s Monetary Policy Committee has been split for months over whether the UK needs a boost to the economy through QE, an increase in interest rates to stave off inflation – which at 4.5% is well over double its target – or to leave things as they are.
Only one member, Adam Posen, has consistently pushed for more QE.
King said the economic landscape was unfamiliar – the world had changed in the past three months and so had the policy response necessary. He said the economy was not growing quickly enough, and he could not rule out a further bout of QE.
Last week, data showed the UK economy grew by 0.1% between April and June, which was less than previously thought. “The deterioration in the outlook has made it more likely inflation will undershoot the 2% target in the medium term,” the Bank said in a statement announcing its policy decision.
Osborne had said in 2009, when he had been in opposition, that “printing money is the last resort of desperate governments when all other policies have failed”. However, speaking to BBC Radio 4’s Today programme last Friday, the chancellor said: “We inherited a pretty desperate fiscal position and we had to take action.
“I think the crucial difference this time is you’ve got a credible government plan to deal with our debt.”
Osborne added the UK was using “all the tools available to deal with the worsening global debt storm”.
“Given the continued impairment in the flow of credit to parts of the real economy, notably small and medium-sized firms, the Treasury is exploring further policy actions.”, he said.
Quantative easing means effectively adding more money into economy. Central banks increase the supply of money by “printing” more. In practice, this may mean purchasing government bonds, for example, using the new money. Rather than physically printing notes, the new money is issued in the form of a deposit at the central bank. QE adds money into the system, which depresses the value of the currency, and to push up the value of the assets being bought and to lower longer-term interest rates, which encourages borrowing and investment.
