The Bank of England announces it is effectively printing more money
JON SNOW, PRESENTER, CHANNEL 4 NEWS: The worst is over, or so some of the experts keep telling us. But if there are signs of green shoots of economic recovery, why did the Bank of England suddenly inject another £50 billion into the British economy? As expected, the bank said it was keeping interest rates on hold at 0.5 percent. But then it announced it was effectively printing more money, expanding what’s known as quantitative easing to a total of £125 billion—this at a time when there is concern over whether the policy is doing anything to ease the credit crunch. Here’s our economics correspondent, Faisal Islam.
FAISAL ISLAM, ECONOMICS CORRESPONDENT, CHANNEL 4 NEWS: The economy is still contracting, but not as precipitously as a few months ago. So why is Mervyn King, at the Bank of England, creating £50 billion more of his magic money to pour into the economy, the money the bank is assuming into existence, now set to reach 80 percent of national output—more than National Insurance and Council Tax combined? There’s been lots of talk in recent weeks and action on stock markets that’s suggestive that we’re on some sort of road to recovery. And whilst we might be past the absolute worst, the Bank of England’s surprise action today is more suggestive of a bumpier road ahead. And indeed there are question marks about the Bank of England’s entire policy of creating money. With the conventional bank base rate now stuck at 0.5 percent, the Bank of England has switched to unconventional measures, buying up government and corporate debt in a bid to bring down longer-term interest rates. It’s that policy that was unexpectedly extended today.
GEORGE BUCKLEY, CHIEF ECONOMIST, DEUTSCHE BANK: This was a surprise the markets weren’t expecting. And sterling fell on the news. Interest rates also came down. So that does suggest that the markets weren’t expecting this. And the reason that the Bank of England has done it is because, despite the fact that we’re seeing some green shoots of a recovery, the economy is still desperately weak. We’re likely to see economic growth negative for the remainder of the year, and it’s going to take a long time until we get out of this recession.
ISLAM: Here’s the number that the Bank of England’s trying to influence: interest rates on government debts. Three months ago, this rate was 3.85 percent. Then the Bank of England introduced its policy of quantitative easing, and the rate fell to 2.9 percent. But since then, this key rate has been rising, standing today at 3.76 percent—almost back to where we started. No obvious signs of turnaround at the half-state-owned Lloyds Banking Group. In surprise results released today, the bank announced a 50 percent jump in provisions for bad company loans, arising mainly from the commercial property portfolio of HBOS, which it rescued last year. Lloyds does now have a huge safety buffer, but mainly because of the toxic problem being transferred from bank to taxpayer. It might need to write off £11 billion of corporate loans this year. Everyday retail banking—that’s loans to you and me—will also see rising losses this year. Lloyds is hoping to move many of these loans into the government’s asset protection scheme. Under the terms of that deal, the bank will have to absorb the first £25 billion of losses, but after that, 90 percent of losses will be covered by the taxpayer. That’s likely losses of tens of billions of pounds.
PAUL MYNERS, FINANCIAL SERVICES SECRETARY: Current operating profitability is on a significantly improving trend which we should welcome because it means that banks are able to lend again and they are doing that. There is real evidence that [inaudible] extension is increasing as a result of the actions taken by the government and the banks. But they also tell us if any bloody story about the consequences of some rather foolish lending decisions that were made over the last two or three years.
ISLAM: State-controlled RBS rules have indicates how much of the risk its toxic balance sheets will be transferred to tax payers. Moreover, the recently signed contracts of £600 billion of insurance are the biggest contracts signed by the UK government since World War II to deal with these weaponry from US. The governments hope that these huge deals and the Bank of England’s money creation will help win the battle against the savage recession.
SNOW: Faisal Islam.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.