Call for a fairer post Brexit Britain
Q. How could the Bank of England create a fairer post Brexit Britain?
A. By diverting Quantitative Easing cash into catalytic funding for the Responsible Finance sector
As the UK’s post Brexit world begins to take shape, there’s discussion that the Bank of England (BoE) may undertake further quantitative easing (QE). Responsible Finance, the umbrella organisation for responsible finance providers, has been quick to respond with a proposal encouraging the BoE to invest in our sector and make this round of QE far fairer. In this blog, I explain what QE is and why investing the new cash it creates in our sector is the right thing to do …
So, what is QE?
QE encourages banks to pump money into the economy…
Central banks are responsible for managing inflation. Before the financial crisis of 2008-09 they achieved this by adjusting the interest rate at which banks borrow overnight. Ultimately, even cutting the rate to almost zero, failed to spark recovery. And so central banks began experimenting with other tools to encourage banks to pump money into the economy. One of them was QE.
QE creates new electronic cash, swelling bank reserves…
To carry out QE central banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy.
QE encourages banks to make more loans…
Like lowering interest rates, QE stimulates the economy by encouraging banks to make more loans. Banks take the new money and buy assets to replace the ones they have sold to the central bank. This raises stock prices and lowers interest rates, in turn boosting investment.
QE keeps interest rates down…
Today, interest rates on everything from government bonds to mortgages to corporate debt are probably lower than they would have been without QE.
So why is QE bad?
QE is not bad per se. As explained above, it has previously succeeded in encouraging banks to make more loans, and thereby boosted economic recovery by raising confidence. However, there is plenty of evidence that it was the top 5% of households that benefitted most, as reported by the BBC’s recent ‘Bank of England defends QE but admits rich benefit most’ article. RF thinks this is unfair. We agree.
RF proposes that the BoE could get funding to the businesses, entrepreneurs, civil society organisations, individual and homeowners that most need it, quickly and responsibly, by using some of the cash created by QE to set up catalytic funding for the RF sector.
The potential annual demand for responsible finance in the UK is around £5.45 – 6.75 billion. Responsible finance organisations, if capitalised to do so, have the potential to generate sustainable economic development and social well-being in UK communities, including in the poorest members of society who did not benefit from the last QE round.
We have effective mechanisms and a track record of moving quickly but responsibly to get finance to those who most need it, and, in the case of business loans, to provide the type of mentoring and support that enables businesses to become main-main-stream finance ready.
Investing in Responsible Finance providers is a proven way to ensure that the distribution of any new cash released through QE trickles through to those who need it most. We will continue to campaign to make this happen. Why not join us and add your voice to other responsible finance supporters who are passionate about ensuring fair access to finance?