Readers Question: The Bank of England has released £15bn into the economy. That increase in the money supply will surely cause inflation? So interest rates having fallen will be raised, worsening the housing market and making the credit crunch even worse, not better….surely?
The Bank of England is planning to inject money, primarily into the mortgage markets. It will be unveiling a plan today to release money into the money markets to help banks finance mortgages.
This particular increase in the money supply is unlikely to cause inflationary pressure.
- Even if the Bank of England increased the Money Supply by £50billion, it is still a small % of total GDP. (over £1,200bn).
- Total UK Mortgage debt stands at £1.19 trillion — or about 84% and there mortgage companies are struggling to raise sufficient funds because credit has dried up on the money markets. Many analysts suggest that this £50billion is unlikely to sovle the problem of credit shortages. (BoE plan to inject money)
- The injection of £50billion will have a positive effect on the Money supply, but, it comes at a time of declining credit and availability of money. Demand pull inflation is not a problem at the moment.
- If the Bank had injected £50 billion at the height of the lending boom in 2006, then the injection of money at that time may have caused inflationary pressure, but at the moment, they are merely trying to restore a semblance of normality to the mortgage sector – it will not cause a lending boom.
- The most serious threat to inflation at the moment is coming from cost push factors. But, it maybe that the Bank feel they need to allow inflation to go above the target rather than risk a recession.