Bank of England Policymakers Should Focus on Tangible Stimuli

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By Shane Croucher | February 1, 2013 2:23 AM EST

Britain's consumers need to feel stimulus directly if it is to help lift confidence (Reuters)

Official GDP figures, weak though they may be, are abstract in the minds of many Britons.

Jobs and homes, on the other hand, are tangible parts of peoples' lives. These are their everyday encounters with the economy in which they exist, and are therefore likely to have a deeper impact on overall consumer sentiment than some vague headline number for output.

This may explain why confidence among Britons appears to have risen in January, according to market research agency Gfk NOP - so much so that people are getting a rumbling stomach for major purchases.

It also sends a signal to policymakers - both in government and at the Bank of England - that they may see better results from stimuli which have a direct and tactile impact on people living and working inside the economy.

Take the Funding for Lending Scheme (FLS), a credit easing initiative carried out by the central bank and backed by the Treasury, which is designed to free up affordable finance.

So far it appears to have seen most success in bringing down residential mortgage costs, with both deposit requirements and interest rates falling for first-time buyers looking to borrow from some of the UK's biggest banks.

In the first three months of FLS, which was launched in June 2012, around £500m made its way into the economy through increased credit availability in the form of SME finance and home loans.

Much more is expected to follow.

This has helped stimulate demand in the housing market as an increasing number of people are finally able to place their first foot on the property ladder. In turn, house prices are rising.

Nationwide's latest House Price Index shows an increase of 0.5 percent overall in January. While house prices are down 4.6 percent on a year ago, this lift suggests that FLS is starting to have an impact.

The UK labour market has also been described as robust in recent months, despite the domestic economic malaise and wider downturn across the globe.

While the official employment numbers are drawn from a broad definition - including people who have worked for just one hour a week, as an example - there are positive signs in the increasing number of people finding full-time work.

There were 113,000 more people in full-time employment in the three months to November than the quarter before. Some theories suggest that stagnant wage growth and pay cuts have helped limit the number of job losses.

Still, having a job, even if salaries are being outpaced by inflation, is better than unemployment and helps underpin confidence in the economy.

So what can we say about all this?

The Bank of England's stimulus, until FLS, focused mostly on improving banks' balance sheets.

It allowed them to access cheap loans by using dodgy collateral in secured lending in order to keep capital flowing through the system.

Then there has been the £375bn quantitative easing programme where the central bank has bought up around half of the gilts available in the markets, to keep them liquid and hold down yields on UK sovereign debt.

Yet the effectiveness of these policies is difficult to measure, and for the average Briton, the effects are largely invisible, even if they do have an impact on the economy.

If policymakers want to bolster consumer confidence, get them spending rather than saving, and in turn lift the spirits of the service sector upon which this country's output relies so heavily, then more then more direct-impact stimulus like FLS is needed.

Stimulus, through fiscal or monetary policy, which creates jobs and helps improve the personal financial situation of consumers, will help the economy to discover that elusive recovery.

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