Cable Says U.K. Should Consider ‘More Imaginative’ Use of QE
Business Secretary Vince Cable called on the Bank of England to expand money supply if demand continues to falter following a promise by Chancellor of the Exchequer George Osborne to support economic growth.
Cable said the central bank should consider quantitative easing, or buying securities to increase the money in circulation, beyond its existing purchase of 200 billion pounds ($326 billion) of mostly government bonds. Data this week will show second-quarter U.K. economic growth slowed as weak consumer spending restrained a recovery, economists said.
The right approach “is not for the government to relax its fiscal discipline, we have to keep that going,” Cable told BBC Television in London today. “It’s about the Bank of England pursuing policies such as low interest rates, which is also helping our exchange rate down, and also using an expansion of quantitative easing, perhaps in more imaginative ways, not just acquiring government securities.”
The government coalition has relied on bank Governor Mervyn King to pursue an ultra-loose monetary policy by keeping interest rates at 0.5 percent even as inflation reached 4.2 percent in June, more than double the 2 percent target set by Osborne. Critics including the opposition Labour Party say the government’s plan to erase the deficit with the deepest spending cuts since World War II has shattered consumer confidence.
Economists including Danny Gabay at Fathom Financial Consulting say the central bank’s purchase of government securities failed to feed through into the real economy and has instead been used by banks to strengthen their financial position.
Cable and Osborne will be given 24 hours advance reading of the gross domestic product figures which are due on July 26. Osborne today said he will push ahead with plans he calls the “growth strategy” later this year, which aim to remove burdens on companies. The plan doesn’t involve scrapping his five-year fiscal plan by loosening fiscal policy.
“We have to earn our living, take risks and go for growth,” Osborne wrote in the Sunday Telegraph today. “The measures I announced in the budget are being implemented, but we will need more. In the autumn I will do that.”
Gross domestic product rose 0.2 percent, according to the median of 32 forecasts in a Bloomberg News survey, which compared with a 0.5 percent increase in the first quarter and an equal contraction in the final quarter of last year. The government’s March annual budget has expected a 0.4 percent expansion in the second quarter.
Output was hit in the second quarter by supply disruptions stemming from the earthquake in Japan, while plants shut down and workers booked vacations to take advantage of consecutive four-day weekends in April to mark Easter and the royal wedding. Bank of England policy makers left their benchmark interest rate at a record low this month and warned that the current economic weakness may persist “for longer than previously thought” while inflation could rise above percent.
Ed Balls, who shadows Osborne in Parliament and is responsible for economic policy for the Labour Party, said this week’s figures will be evidence that the government’s plans aren’t working and reiterated calls to loosen public finances and cut taxes.
“He has decided to put us in a new Greek-style trap,” where low growth means there’s a shortfall in tax revenue, Balls told Sky News today. “It’s not working.”
Cable told the BBC that the biggest risk to the British recovery now that euro-area countries have agreed to a new bailout for Greece comes from a U.S. failure to lift its debt ceiling because of “a few right-wing nutters in Congress.”
U.K. manufacturing growth slowed in June, while expansion among services companies remained “below trend,” Markit Economics Ltd. said in reports this month. Consumer confidence fell as Britons grew more pessimistic about the outlook for the economy, Nationwide Building Society said on July 21.
Four of the economists surveyed forecast a contraction in the second quarter, with Hetal Mehta at Daiwa Capital Markets Europe Ltd. projecting a 0.3 percent drop in GDP. At the other end of the range is Azad Zangana at Schroders Plc, with a forecast for growth of 0.4 percent.
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