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Quantitative Easing Won't Fix UK Problems: Economists

Wednesday, 12 Oct 2011 | 7:05 AM ET

The latest round of quantitative easing launched by the Bank of England (BoE) will not provide the stimulus that small and medium sized businesses (SMEs) need in the UK, economists told CNBC Wednesday.

Traders work on the floor of the London Metal Exchange in London, U.K., on Friday, Aug. 5, 2011. Stocks dropped for an eighth day, the longest losing streak since January 2010, and commodities declined on concern the U.S. recovery is faltering. Photographer: Chris Ratcliffe/Bloomberg via Getty Images
Bloomberg
Traders work on the floor of the London Metal Exchange in London, U.K., on Friday, Aug. 5, 2011. Stocks dropped for an eighth day, the longest losing streak since January 2010, and commodities declined on concern the U.S. recovery is faltering. Photographer: Chris Ratcliffe/Bloomberg via Getty Images

While the government has declared that it wants to help out small businesses, and has set up Project Merlin with British banks to try to help fund small businesses, Business Secretary Vince Cable admitted this week that "new mechanisms" will have to be considered.

"The SMEs are not really getting the money that we would like them to get," Stephen King, Chief Global Economist at HSBC, said.

"Quantitative easing has not necessarily targeted the right thing."

"I think what the Chancellor is trying to do is provide access to finance in the corporate sector and protect companies who don't have access to the bond and equity markets," Andrew Sentance, former Monetary Policy Committee member at the BoE told CNBC.

"The difficulty here is this is quite a long standing issue which goes back to the 1931 Macmillan Report. It's not necessarily going to be resolved very quickly."

Sentance, who said ahead of thelatest round of quantitative easing thatit could harm the UK economy, added that it would not be the "magic bullet" SMEs need in the UK.

The Macmillan Report, which looked into the causes of the Great Depression, concluded that there was a substantial gap between the financing needs of small business and the amount of money lent to them by banks – which later became known as the Macmillan Gap.

Larger companies are also spending less on mergers and acquisitions, and investing less, as the future looks less certain.

"There are still a series of uncertainties stopping bigger companies investing in smaller companies, such as uncertainties about burden sharing, debt, whether we're going to have more austerity, or a crisis on Capitol Hill, and all of that undermines the effectiveness of monetary policy," said King.

Federal Reserve Chairman Ben Bernanke warned last week: "Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy."

"The argument between the Treasury and the Bank of England is that surely the Bank could buy other bits and pieces that could help smaller companies," said King.

"The other thing with QE is that when you print money sterling could come down, which could make exports more competitive."

While sterling has weakened against the euro since QE was brought in, this may not provide the stimulus needed to kick-start the UK economy.

"The impact on sterling hasn't been beneficial, and it's gone beyond what is necessary to make manufacturing competitive," said Sentance.

"Pushing it further down actually risks generating more inflation, squeezing consumers and service sectors more, with relatively little benefit to manufacturers.

He said that the ideal level for the pound was around 1.25 euros ($1.72), while it is currently around 1.15 euros.

British government bond yields have fallen since the first round of quantitative easing was launched.

"There are real questions about how much traction the government is going to get from this policy in the financial markets given the current level of bond yields," said Sentance.