Bank of England to cut borrowing costs in specific areas to stimulate growth

The Bank of England may cut borrowing costs in specific areas of the economy if its programme of quantitative easing proves ineffective in stimulating economic growth, a member of the Monetary Policy Committee has said.
 
Adam Posen told a conference in Washington last week that the Bank’s next step, if necessary, would be to shift into “heavy-duty credit easing”, which would involve focusing on specific sectors in the same way that the US was currently doing with the housing market.
 
The Bank of England, like the US Federal Reserve, has embarked on a £200bn programme of gilt purchases in a bid to boost economic growth, after having lowered benchmark interest rates to an historic low of 0.5%. The fear is, however, that further quantitative easing may lead to diminishing returns.
 
Posen played down the usefulness of having the US Federal Reserve target the yield on the 10-year Treasury note as another possible alternative strategy. But he said that because current UK inflation rates of 3.1%, which are well above the central bank’s 2% target, were due to the financial shock on world markets, policymakers had some latitude in how they chose to respond.
 
In news elsewhere, MPs from all parties have approved the appointment of Richard Chote as new head of the UK’s official budget watchdog, the Office for Budget Responsibility, in a move that would appear to pave the way for greater independence from government.
 
After a confirmation hearing in front of the Treasury select committee, during which MPs and the candidate repeatedly implied that the confirmation was a foregone conclusion, Andrew Tyrie, the committee’s chairman, welcomed the outgoing director of thinktank the Institute for Fiscal Studies as the watchdog’s new chairman.
 
But it appeared that important details of how the OBR will operate have yet to be tied down. According to the Financial Times, Chote asked MPs to ensure that legislation to set up the body provided him with guidance on how it should respond to opposition party requests on how to model their policies. His fear was that the organisation would have to determine the rules of engagement with political parties in a legislative vacuum.
 
Some MPs were keen that the OBR be accountable to parliament rather than the Treasury to avoid the chancellor starving it of funds if its findings were unacceptable to him. Chote, in turn, hoped that the body would have a clear four-year budget to prevent it from being dependent on Treasury funding on a year-by-year basis.
 
He said that he would seek to maintain the OBR’s independence despite a continued reliance on internal Treasury data, but said that his staffing budget was likely to restrict his office to employing between 15 and 20 staff.