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Gilt rout defended rather than SME loans

The Bank of England has defended using its quantitative easing programme to buy only Government debt instead of using some of the money to boost bank lending to small and medium-sized businesses.

The bank has used £325bn of new money to buy gilts since March 2009.

At a Treasury select committee hearing last week, Labour MP George Mudie told BoE executives that the policy is not helping the wider economy.

He suggested the bank should look at using the money to buy “other assets” in an attempt to increase SME lending by banks. He did not detail what these assets should be.

Bank governor Mervyn King said QE represents a fraction of banks’ balance sheets, which are worth around five times the UK’s GDP, so it would not be an effective way of creating a boost for lending. He said: “The question is how do we give banks confidence to lend more than they are now. It is either direction or incentive, which means a subsidy, and that is a matter for the Government.”

MPC external member Adam Posen said in relation to the execution of monetary policy, the current approach is having “the desired effect” on the economy.
He said he pushed the committee to consider other types of asset purchases but the idea was rejected.

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