PricewaterhouseCoopers has warned new policy interventions to boost the economy such as writing off some of the Government’s quantitative easing debt could cause inflation to rise and damage the Bank of England’s reputation.
In his Mansion House speech last week, FSA chairman Lord Turner (pictured) warned the Government may need to consider “further policy innovations” if the Bank’s Funding for Lending scheme and the FSA’s relaxing of its capital rules on loans made through the scheme do not succeed in boosting growth.
Turner did not expand on what these extra measures could be but it has been suggested the Bank of England could write off some of the £375bn of Government debt acquired through quantitative easing.
PwC chief economist John Hawksworth says: “The risk is this could be inflationary as it effectively would amount to creating money to plug the budget deficit. The Bank might start to look at these more unconventional measures in a couple of years time, but if it did it now it could prove counterproductive as it would damage the reputation of the Bank as a protector of inflation.”
Institute for Public Policy Research chief economist Tony Dolphin says: “The principle makes me nervous. The price of doing it would be that a precedent would be set that could make financial services markets nervous that this measure could be used again and again.”