BOE FOCUS-Solar panels shine light on UK policy dilemma

BOE FOCUS-Solar panels shine light on UK policy dilemma A Bank of England-sponsored solar panel for every roof in Britain to jump-start the stagnant UK economy? The suggestion, at an alternative economics conference a few weeks ago, brought a frown to the face of the BoE policymaker present, Adam Posen. One proposal to tackle this is for the BoE to extend the small volume of corporate bonds it purchases to include those issued by British banks. "Once the authorities start to accumulate huge sums of unsecured claims on the United Kingdom banks it will not take long before the market reaches the conclusion that the banks cannot be allowed to fail because taxpayers would realise a massive loss. REJECTION So far BoE policymakers insist there isn't enough evidence to suggest the 125 billion pound round of QE conducted between October 2011 and May 2012 is less effective than the 200 billion pounds done between March 2009 and February 2010. "From a very narrow monetary policy perspective something might make the world a better place, but from a financial stability perspective it might look lousy," said Richard Barwell, an economist at Royal Bank of Scotland. The pressure is on the central bank to do something, however, because the government has little room to add stimulus via tax cuts or spending as it tries to bring down a huge budget deficit with economic output is still 4 percent below its peak. Buying British government bonds with newly created money - so called quantitative easing, or QE - was a radical policy when the BoE started in March 2009, but 325 billion pounds later critics argue that it has lost the power to spur growth by cutting the cost of private-sector borrowing. One stimulus option recommended by the IMF is a cut to interest rates, which may be more feasible than in the past as banks now have greater scope to cut the deposit rates they pay to savers, allowing them to preserve their margins while cutting rates to borrowers. But this was again rejected by BoE policymaker Ben Broadbent last week, and in any event would only have a one-off impact. In theory this should give the banks plenty of new funds to lend to businesses and households, something the BoE says it is ill-equipped to do itself. However, this approach has serious flaws, says RBS's Barwell. Subsidising banks' finance costs in these circumstances would be too risky, Barwell said. In addition, while a rate cut might reduce the cost of borrowing, it would not necessarily improve the availability of credit - something many businesses argue is a bigger problem. Cut rates more, perhaps. BoE figures show the average interest rate on a typical two-year fixed-rate mortgage has risen to 3. And second, the BoE is already concerned about "encumbrance" - the danger that banks set aside so many assets for secured lending that unsecured lenders worry there is little left for them. "They ought to be thinking outside the box," said Alan Clarke, an economist at Scotiabank who argues that QE has failed to stop an upward drift in mortgage costs faced by households and in firms' borrowing costs. Most business borrowing costs show similar rises - despite the fact that the cost of two-year government borrowing recently hit a record low of 0. What now? Since the solar panel idea was mooted, even bastions of economic orthodoxy such as the International Monetary Fund have urged the British central bank to find a better way to boost growth than what they've been doing. However, these proposals have a problem. BOE FOCUS-Solar panels shine light on UK policy dilemma Trade News selected by Local Linkup on 13/06/2012