Back in early 2009, around the time the Bank of England was first firing up the printing presses, one of the oft-stated aims of quantitative easing was for it to produce a sharp increase in broad money, which acts as a guide to the amount of bank lending in the economy.
Broad money growth of 6-8 per cent would have suited the Bank — and the UK economy — nicely. If only.
As the chart above shows, quantitative easing has failed to produce the sort of pick-up that the MPC had hoped for.
There are many reasons for this. One of which, according to former MPC member Charles Goodhart, is the Bank’s practice of paying interest on reserves held in their coffers.
Mr Goodhart today accused the authorities as having “connived” would-be lenders into keeping their cash on deposit at the central bank by paying interest of 0.5 per cent on banks’ reserves.
Mr Goodhart argued that this is discouraging banks from lending. After all, why bother to risk making a loss on a bad loan if you can earn interest by parking your cash at the central bank? Read more