Directors call for another round of quantitative easing

Graeme Leach, chief economist at the business lobby group, urged Bank of England policymakers to agree a £50bn extension to the existing £200bn scheme at the monetary policy meeting.

Quantitative easing is designed to inject money directly into the economy to boost spending when businesses and consumers tighten their belts.

Mr Leach said: “The time to launch QE2 has arrived. The downside economic risks are sufficiently great to warrant an extension in quantitative easing now, in order to avoid the risk of a double-dip recession.

“We already have an L-shaped economic recovery and the hit to business and consumer confidence over the summer risks a slip back into recession, which could have dire fiscal consequences.

“Expanding QE by £50bn initially is a sensible and limited response.”

The IoD said the extension is justified by the very weak growth in money supply. It warned that the velocity of money – the number of times it changes hands – could decline over the coming months.

It said the knock-on effect of the eurozone crisis is damaging business confidence and leading to the postponement of investment projects.

“Given the weakness of the recovery to date, business and consumer confidence could be the tipping point between recession and recovery,” added Mr Leach.

The IoD also said that continued deleveraging and increased capital requirements in the banking system suggest that money supply growth will remain close to zero without QE2.

The group said: “The fiscal consequences of a double-dip recession could be dire. The future fiscal risk warrants a monetary easing now.”

The policy works by the Bank purchasing assets – mainly Government bonds – from private sector businesses which ultimately leads to a fall in the cost of borrowing for businesses and households and in theory encourages them to spend more.

There is a danger though that this could increase inflation, which is already well above target at 4.4 per cent and squeezing household budgets.