The Bank of England’s chief economist today rebuffed criticisms of its radical quantitative easing (QE) scheme to pump extra funds into the economy using newly created money.

Spencer Dale rejected attacks on the QE scheme from critics who claim that it has not proved effective in easing the flow of credit to struggling businesses, and who complain that the effect of the strategy is diluted by funds leaking to overseas institutions.

Mr Dale, speaking at the Society of Business Economists conference in London, admitted that it was still too early to judge the impact of the controversial QE programme but said that early indications were positive so far.

“It is still early days in terms of judging the ultimate success of the programme in stimulating nominal spending, but initial indications remain encouraging," he said.

He addressed concerns that most of the funds spent by the Bank on the asset purchases through which it channels the newly-created cash into the economy had gone on buying government bonds (gilts) rather than or corporate bonds or commercial paper.

Business groups and others have urged the Bank to shift the focus of the scheme and buy more corporate debt in an attempt to stimulate corporate lending markets. Mr Dale said that the Bank was continuing “to review actively the case for extending its operations into other corporate credit markets”.

Confronting criticism that the effectiveness of QE is being undercut as foreign holders of gilts sell these assets to the Bank so that the QE funds then flow abroad, rather than into the UK economy, Mr Dale said that even when this was the case the impact was still beneficial.

“Even if that is the case, it does not mean the asset purchases will not have any economic benefit,” he said. “Rather, more of the effect will come through a lower exchange rate.”

He also brushed off claims that questions over QE were raised by recent sharp increases in market interest rates, in the form of the yields on gilts, which the strategy was designed to hold down in order to provide additional stimulus to the economy.

He said that gilt yields remained lower than they would have otherwise been had the QE scheme not been in operation, while the flow of funds through the economy, shown by the money supply, had also picked up.

So far the Bank has purchased a little over £6 billion of assets under its programme and is scheduled to complete its present plans for total purchases of £125 billion in assets by the end of July.

Much of the City expects that it will expand the scheme further, to the maximum of £150 billion currently authorised by the Chancellor, although economists are divided over whether the Bank will seek authority to do still more.

Criticism of the effectiveness of QE in easing corporate borrowing conditions will be stoked today by new data from the British Bankers’ Association showing that lending to companies by banks remains extremely constricted.

The BBA reported this morning that net borrowing in May by non-financial businesses edged up by a meagre £100 million, after falling by £2.3 billion in April.

While the weakness of the figures partly reflects low demand for loans from businesses at a time when managements are curbing investment in the face of the recession, the data will also be seen as further confirmation that banking groups are continuing to screw down lending to companies.

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