Kate Barker speaks to South London Business

The Bank of England’s decision to introduce quantitative easing – that is, increasing the supply of money in the economy – was a necessary move as the latest response to the current financial crisis. This was the view expressed by Kate Barker, a member of the Bank’s Monetary Policy Committee, in an exclusive briefing to business leaders form south London.

“I strongly support the move to quantitative easing, and consider that once this became necessary, it was important to act in a decisive manner,’’ Ms Barker told her audience at the Park Plaza County Hall Hotel. The event was organised by South London Business before an invited audience (March 12)

Looking to its potential effects of Ms Barker explained: “While the scale and timing of these various impacts is uncertain, quantitative easing should bring about a pick up from the present weakness in nominal spending, supporting economic activity. Concerns about inflation expectations falling too far should also be eased, and together these factors should push CPI (Consumer Price Index) inflation back towards the 2% target, after a period below target in the near term.”

There were, she said, many challenges for policymakers emerging from the present economic turmoil, and she went on: “In the future, there may well be efforts to devise measures to manage the overall growth of credit, and to ensure financial institutions take on less overall risk than in the immediate past. But it is not entirely easy to devise sound policies to prevent individual households from taking on more risk during stable periods, due to their

misperceptions of the long-term outlook.”

The implications might be that the public sector also needed to move to a stronger financial position in times of stability than appeared justified just in terms of the public finances, “…in order that it can provide support to the private sector when the inevitable economic shocks occur.”

Earlier in her talk, Ms Barker had addressed the issue of the level of interest rates, with the Bank Rate only recently having been reduced to an historic low of 0.5%. Addressing the issue of financial institutions and their response she said: “Since it is very difficult to pay savers negative interest rates, the last few interest rate cuts have not been passed on fully to savers or borrowers. While this has enabled banks and building societies to retain a margin between saving and borrowing rates, it has also lessened the impact of Bank Rate cuts. For some mortgage lenders with a large stock of tracker mortgages, lower interest rates have increasingly squeezed their margins, potentially reducing their ability to increase lending in the future.” This is where quantitative easing had come into play.

She told her audience: “It is clear that governments as well as central banks remain focused on tackling this crisis with a range of policies aimed both at supporting the overall economic position

of their economies and at tackling the specific problems in the banking sector which are holding back the supply of credit. In addition the fall in the oil price is a beneficial factor, and for the UK the substantial depreciation of sterling (now well over 25% since its most recent peak in July 2007) will support the substitution of

domestic production for imports as well as boosting exports when the global economy recovers. As the MPC commented in the February Inflation Report, this all adds up to a powerful stimulus. “

Today the economic problems were those of instability. The evidence over the past month was of more pronounced weakness in the global economy and of fragility in the financial markets. This suggested that the downside risks to growth, and therefore to inflation, identified in the February Inflation Report, were in danger of crystallizing. “I believe,” concluded Ms Barker, “that the

MPC’s significant move to increase the money supply will help to support the economy through this difficult period, and that it is the best course in order to achieve our objective of keeping inflation to target in the medium term. Of course, I recognise that at some point this stimulus may need to be unwound, possibly rapidly,

to avoid an overshooting of inflation – and remain equally committed to acting as necessary to prevent this.”