Sir Mervyn King has dismissed claims he “ignored” requests from Chancellor George Osborne to make it easier for small and medium enterprises (SMEs) to access lending.
The Bank of England governor told MPs on the Treasury Select Committee that it was “complete nonsense” that he ignored pleas for Osborne to help small businesses.
Labour MP George Mudie told the governor that “everyone in the room” knew the Bank’s quantitative easing (QE) programme “was not working for SMEs” and he was not sure the Monetary Policy Committee (MPC) had the will to help them.
However, Sir Mervyn said: “That’s complete nonsense. We are working closely with the Treasury on schemes that will help SMEs.”
About £11bn has been used to increase lending to small businesses, said Sir Mervyn, even though much of the money from QE was used to purchase Government bonds. Giving banks incentives to make more funds available was the best way to increase lending to small firms, he added.
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Sir Mervyn defended the Bank’s move to pump an additional £75bn into the economy through its QE programme, despite the risk of driving up inflation. MPs asked the governor whether the decision would result in increased inflation, which hit 5.2 per cent in September and made life difficult for cash-strapped households.
The MPC feared inflation could drop below its two per cent target in the future and so unanimously made the decision to restart the QE programme, said Sir Mervyn.
MPs also quizzed Sir Mervyn about why it took so long for the Bank to launch the programme, but he told them the MPC’s view was altered by the notable deterioration in the world economy and eurozone in August.
When asked by Conservative MP Jesse Norman about the effect the addition QE programme would have on inflation, the governor said: “Any easing is going to have the effect of expanding demand, output and inflation. When we undertook the next round, we did it because we thought there was a real risk of inflation looking ahead going below the target and we wanted to offset that.”
He was also criticised over the Bank’s record of regularly missing its two per cent inflation target. Sir Mervyn said: “I accept responsibility for not pushing interest rates up earlier this year or last year. We did that because we were faced with a difficult decision and we felt it was better than pushing the economy into a deep recession, with higher unemployment.”