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Only the Government, not the Bank, can do ‘heavy-lifting’ to boost business confidence

04 Aug 2016

HM Treasury signIn response to the Bank of England’s decision to reduce interest rates to an all-time low of 0.25% and to inject billions of pounds into the financial system, James Sproule, Economist at the Institute of Directors, said:

“In the aftermath of the referendum, the Bank of England’s credibility in promising it would do whatever it took to maintain market liquidity was very important. But the problem now is confidence, not liquidity or access to capital.

“The cost of capital is not the major factor for business at the moment, with a survey of IoD members showing this week that six in ten think this interest rate cut will not have a discernible effect on their performance. The decision to increase gilt purchases, when yields are at historic lows, risks further distorting asset prices. It might have been preferable to indicate what forms of further unconventional monetary policy were being contemplated, buying corporate bonds and providing more cheap money to banks, and then to wait for more concrete signs of an slowdown before taking these steps.

“The Bank cannot do the heavy-lifting on boosting business confidence, the Government has to play its part. The real test of confidence is going to be the Autumn Statement, which could be usefully brought forward several weeks. We would like to see moves to raise the Annual Investment Allowance to half a million pounds, which would encourage business to buy productivity-raising new machinery. Delaying the introduction of the badly-designed Apprenticeship Levy would also remove one short-term regulatory headache for firms.”  

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