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The Bank of England was under pressure today to print more money amid signs that its quantitative easing programme is not yet working.
Figures today showed that little of the extra money being pumped into the economy is reaching households and businesses as banks hoard cash to bolster their balance sheets.
The Bank is injecting cash by buying assets such as Government bonds and corporate debt held by commercial banks and other financial institutions.
The annual growth rate of M4 money supply was just 2.5% in March — down from 3% in February and the lowest since records began in 1998. Money supply to households rose by £3.3 billion or 3.7% in March but supply to business fell by £4.1 billion or 2.1%.
Howard Archer, chief UK economist at Global Insight, said: “This suggests that banks were still reluctant to substantially step up their lending to corporates. This is critical for recovery prospects.”
The banks' reluctance prompted calls in the City for the Bank to extend quantitative easing and it might outline an extension as early as next week's meeting of the monetary policy committee.
The Bank is half way through pumping an extra £75 billion into the economy and has permission from the Government to print a further £75 billion if needed.
Richard McGuire, fixed income strategist at RBC Capital Markets, said: “We remain of the view that the Bank will extend the quantitative easing project beyond the £75 billion currently earmarked owing to the risk of doing too much being the lesser of the two evils.”
Analysts said it was too early to judge the effectiveness of the policy.
Jonathan Loynes of Capital Economics said: “There is little evidence that it is working. The good news is that it is a bit early to make a judgment but the bad news is that there is no certainty that it will work.”
But Philip Shaw of Investec said: “Because the effects of quantitative easing are uncertain, they'll want to look at the effects before committing to extending the scale of purchases.”
Reader views (2)
Why does anyone think that printing money is going to solve the problem? It won't. All it will do is cause rampanent inflation which Govt wants as it erode the value of Govt debt, make Govt programmes in real terms cheaper, raise your taxes, riases interest rates & the money you work for will have less & less purchasing power so your living standards will drop. It is also very bad news for anyone on fixed incomes such as pensioners. The banks are hoarding cash becuase politicians have told them to bolster their balance sheets. You also have banks having further debts to wipe off and also bad debt provision is increasing as people loose their jobs. Also the banks know that their is a ticking time bomb both for themselves and companies with huge number of comapnies needing to refinance in next 12-18 months. They will naturally do what is necessary to ensure their survival and what limited money is left will be available to companies at very high. The banks will decide which companies survive. As companies can't refinance there will be mass unemployment which will reduce income, demand, raise taxes and so the cycle will be continue in a continual downward cycle. The problem will be even worse maybe as early as 2012 but definately by 2016 as all the OAP start drawing their pension only to find that they money isn't there. When that happens Govt will either borrow more money which will mean higher taxes for working population and thus lower living standards
- Rupert, London, 01/05/2009 16:26
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The banks have been told to bolster their balance sheets, and they are doing it.
They cant bolster AND lend to marginal borrowers who are unlikely to repay the debt.
Waving a magic wand of "easing" will not make the debt mountain go away.
Stop deluding yourselves and wake up. This is a 10 year haul at least.
- Dave Davies, Basingstoke, 01/05/2009 15:08
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