Bank of England governor Mervyn King has warned that the central bank’s decision to increase its quantitative easing programme by £75bn will not guarantee an increase in lending by commercial banks.
Giving evidence to the Treasury Committee this morning, King defended the decision to add to the QE programme earlier this month, claiming that lending levels would have fallen much faster had no action been taken. He also rejected the view that the BoE had waited too long to act.
The latest round of QE introduced earlier this month means that £275bn has now been pumped into the UK economy.
King said: “I can’t guarantee that it means that bank lending will rise, but what I do believe is that it won’t fall as far as it might otherwise have done.
“I think the action will make a difference to the amount of lending, but it certainly doesn’t guarantee that lending to the real economy is positive.
“Only the banks are in a position to assess credit for small and medium-sized enterprises. What we have to do is find ways of giving incentives to existing banks in order to lend more.”
King also said that the introduction of QE was partly to offset concerns that inflation will fall rapidly next year. King said inflation could go below the 2 per cent target in 2012, despite it hitting a 20-year high of 5.2 per cent in September 2011.