Central banking and inflation dilemma

Deputy Governor Paul Tucker of the Bank of England told the government this week that he would add funds to the current quantitative easing system that was put in place several years ago now, if the inflation keeps going up, and if demands keep growing. He also talked about the fact that the central bank could be bringing interest rates down into minus territories. This would be a first at the BoE, as stated on their homepage.

Tucker also spoke about a new strategy that would help bring up lending to small businesses. The aim of that is to help them with their growth and sustain their cash flow as they need in order to stay in business. His fellow deputy director, Charles Bean, answered some questions as well, bringing light to the fact that these policies would be good to promote an increase in lending for small business and individuals alike, something that BoE has been keen to want to promote.

One further idea that Tucker had was to let the central bank hold money for all loans backed by the BoE, where an interest rate would be granted to the various banks and institutions, instead of having them be the deciders and providing all of the benefits, but also having all of the responsibilities for these loans. This would remove a burden on the banks, and grant a better oversight possibility to the Bank of England.

So far however, few banks have been willing to get into the scheme. Because of policies passed in the last years, some lenders have had to cut back on the amount of loans that they hand out, and savers have been hit hard as well. Rates went down, while the central bank wants to promote lending, it also means people who have money in the bank are seeing little return in interests.

Right now, 2% is an average rate for individuals and small businesses. This is something that used to not even be possible a few years ago, but the harsh economic climate made it so the interest rates have been dropped several times. The last drop saw the rate go from 3.19% to 2%, and there is no sign that it will go back up any time soon. These rates may bring in some more loans, but it is doing a number of the investments within the UK. People are going out of country in order to invest.

Meanwhile, Tucker is also supervising another program from the central bank that would see an additional £375 billion invested in an asset purchase scheme. This would bring a new stimulus to improve economic growth, and his hope is that it will help other countries as well as the whole world deals with the harsh financial climate. Negative interest rates could even be an option on the table, and the Treasury Select Committee: has been told that there may not be any constraints against doing so.