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February 29, 2012 2:06 pm
Sir Mervyn King, Bank of England governor, called for “patience” in economic policymaking on Wednesday, saying the conditions for sustainable growth in Britain were in place, with the exception of credit availability for small companies.
Rejecting MPs’ calls for the Bank to follow the European Central Bank’s long-term repo operations, which provided a second tranche of €530bn funding to European banks, Sir Mervyn said British banks had no urgent liquidity problems.
On the day the Bank published encouraging figures for the financial conditions of non-financial companies in January, the Bank governor said there was still a problem with lending to small companies and ministers should either force banks in which the taxpayer has a significant stake to lend more to small companies or subsidise them to achieve the same effect.
Quizzed by MPs on what big policy changes were needed to help improve Britain’s growth rate, Sir Mervyn said the preconditions for growth of a lower exchange rate and a credible path of deficit reduction were already in place.
“I think, if there was one word that I think we need to hang on to to drive policy in the next three or four years, it’s patience. We’ve done the things that are necessary,” he said.
Paul Tucker, deputy governor, added that groups representing savers were wrong to say the Bank’s policy of injecting money into the economy through quantitative easing was hurting elderly people and the retired. “If we had not been running an easy monetary policy for the last three years, this economy would have been destroyed,” he said, adding: “I promise you they [savers] would have been even worse off.”
“We could have been in ruination,” Mr Tucker, seen as the leading contender to be the next Bank governor, said.
In particular, Sir Mervyn brushed aside calls for the Bank to emulate the ECB’s offer of cheap three-year funding for banks, saying British banks had ample liquidity. “The idea that the long-term repo operations have eased the supply of finance to small businesses in the euro area is a myth,” he insisted, explaining that there was no way of forcing a bank to use cheap funding to lend to small companies rather than gamble on financial markets.
“What it [the LTRO] has done is to provide a source of funding to banks, particularly in the southern member countries of the euro area which were experiencing a bank run, enabling them to fund the withdrawal of funds,” Sir Mervyn said.
To get money to small companies he said was a job for government. He said: “How do we try to give some encouragement to the banks to lend to small businesses?
“It’s either direction in terms of the banks that the taxpayer owns or it is an incentive to do something which the banks wouldn’t otherwise do, in other words a subsidy.”
He added that discussions with banks over the central bank using quantitative easing to buy pools of small business loans from banks had foundered on the authorities’ insistence that banks put all their loans in the pool. “The banks were unhappy about the idea of a scheme in which the government would participate in all SME lending. Why? Because they didn’t want to share the fruits of the most profitable lending to small businesses.”
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