Britain denies mulling the Zimbabwe solution for economy

January 8th, 2009 - 6:50 pm ICT by IANS  

London, Jan 8 (IANS) The British government Thursday denied reports it was considering printing more money to kick start credit, amid speculation that interests rates were set to fall to a three-century-low.The Bank of England’s Monetary Policy Committee was Thursday expected to reduce the base rate of interest by at least 0.5 percent, which would bring it down to 1.5 percent - the lowest rate since the Bank of England was founded in 1694.

In the bank’s 315-year history, interest rates have never fallen below two percent.

However, economists said a series of rate cuts have been ineffective, arguing the main problem facing the British economy is the lack of credit rather than the cost of loans.

As a result, the Bank of England is being urged to consider printing more money, the Daily Telegraph said.

Finance Minister Alistair Darling told the Financial Times Wednesday the bank would have to work “hand in hand” with the Treasury if it wanted to carry out “quantitative easing.”

Quantitative easing is what economists call the act of printing more money - also known as the Zimbabwe option for the southern African country where inflation hit 11.2 million percent in August 2007.

However, the BBC quoted finance ministry sources Thursday as saying while such a move has not been ruled out, it is not currently on the agenda.

Quantitative easing was pioneered by Japan to counter deflationary problems in the 1990s - as prices fall people tend to hold out from buying goods and services and the economy becomes increasingly sluggish.

Opposition Tory Party’s shadow finance minister George Osborne said, “The very fact that the Treasury is speculating about printing money shows that Gordon Brown has led Britain to the brink of bankruptcy.”

“Printing money is the last resort of desperate governments when all other policies have failed. It can’t be ruled out as a last resort but risks losing control of inflation.”

Hetal Mehta, senior advisor to the Ernst & Young economic forecasting ITEM Club, said the Bank of England was facing a “balancing act”.

“Six months ago, it was juggling slowing economic growth with soaring inflation. Now the Bank has to tread a fine line between avoiding deflation and a further weakening of sterling whilst doing all it can to soften the impact of the recession.”

“Given this dilemma, ITEM believes that a 0.5 per cent cut would be appropriate. However, with survey data continuing to worsen, a larger cut of one per cent is a distinct possibility,” she said.

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