The Bank of England, like most of the world’s central banks, has the remit to keep inflation in check and to provide conditions for economic growth. The Chairman of the Bank of England has described the on-going global financial crisis as the most severe crisis to hit the UK since the Great Depression of the 1930s.
The current chapter in the financial turmoil that has rocked the world since economic storm clouds first gathered in the second half of 2007 is, of course, the sovereign debt crisis. Uncertainty about what the Eurozone economies will do to help Greece and may need to do to help Italy and, arguably, Spain has sent the value of European stocks tumbling – naturally, financial stocks have taken the worst of it. This situation will not have been helped by a decision taken by ratings agency Moody’s to downgrade the rating of 12 UK financial institutions (more on that another day).
Growth within the UK in Q2 has been adjusted down from 0.2 to 0.1%. UK inflation is running at 4.5% – more than twice its target level of 2%. The measures that the UK government has put in place to reduce the UK’s public debt burden are beginning to bite. Reduction of debt comes at a price of subdued economic output – and this at a time when the global recovery (hardly ever at fever pitch since the end of the global recession) is also weakening.
The Bank of England had to do something. It has maintained its 0.5% interest policy which has been in place since March 2009 and is intended to provide “cheap” money to UK business. But, in a surprise move, it announced that a further £75 billion would be injected into the economy, largely to buy government assets. The hope is that this injection of fresh capital will provide enhanced liquidity to the banking sector such that they can lend more money to business and drive growth. This is all fine and dandy, but what is lacking, at the moment, is confidence within the business sector. Only a fool plans to expand in troubled and uncertain times. A concerted effort will be needed not just within Europe, but globally, by political and financial leaders before shattered nerves are calmed.