Do we really need the Bank to buy any more gilts? This week Christine Lagarde and the IMF passed verdict on UK economy :
With inflation well anchored, the United Kingdom has room to cut interest rates and embark on a further injection of money into the economy by the purchase of assets, ie more quantitative easing. The IMF said more monetary and credit easing may be needed to offset the slow growth.
We have long been a critic of the current Asset Purchase Facility as outlined in a previous discussion paper by the Saturday Economist “What’s wrong with QE“. The economy does not need more gilt purchases by the Bank of England. A more flexible approach to the asset purchase facility could be far more effective in easing credit and stimulating growth in the economy.
We argued in November, Credit Easing could be best implemented and quickly by the creation of SME bonds issued by the clearing banks, purchased by the Bank of England and guaranteed by Treasury as part of the existing Asset Purchase Facility.
When the Chancellor of the Exchequer outlined his plans for Credit Easing for SMEs, we questioned then if the proposals as outlined could possibly work. As we said in November, The Chancellor has outlined a proposal to inject liquidity into the parts of the economy, particularly small and medium size businesses. The Governor has indicated the most effective way of helping SMEs quickly would be to provide incentives for lending by existing banks, “they can assess credit risk in a way that no other institution can do”.
Credit Easing could be best implemented and quickly by the creation of SME bonds issued by the clearing banks, purchased by the Bank of England and guaranteed by Treasury as part of the existing Asset Purchase Facility. Banks would have access to capital over an extended term with low coupon cost. This short discussion paper outlines the options for Credit Easing and SME bonds. QE, Credit Easing and SME Bonds.
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