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| MPs are right to question Bank of England's monetary policy MPs are right to question Bank of England's monetary policy | |
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| A long, hard look at the way the Bank of England has conducted monetary policy since 2008 is long overdue so the announcement by the Treasury select committee that it is launching an inquiry into ultra-low interest rates, quantitative easing and forward guidance is welcome. | A long, hard look at the way the Bank of England has conducted monetary policy since 2008 is long overdue so the announcement by the Treasury select committee that it is launching an inquiry into ultra-low interest rates, quantitative easing and forward guidance is welcome. |
| It is worth recalling that when Threadneedle Street slashed the cost of borrowing to 0.5% and began using asset purchases to print money both were seen as temporary measures to deal with an immediate crisis. | It is worth recalling that when Threadneedle Street slashed the cost of borrowing to 0.5% and began using asset purchases to print money both were seen as temporary measures to deal with an immediate crisis. |
| The UK economy is no longer collapsing as it was during the winter of 2008-09 but unconventional monetary policy has become a permanent fixture. Indeed, the aftermath of the Brexit vote saw the Bank cut interest rates still further to 0.25% and increase the size of its QE programme. | The UK economy is no longer collapsing as it was during the winter of 2008-09 but unconventional monetary policy has become a permanent fixture. Indeed, the aftermath of the Brexit vote saw the Bank cut interest rates still further to 0.25% and increase the size of its QE programme. |
| The measures taken during the slump were appropriate at the time. Low interest rates were designed to reduce borrowing costs for companies and individuals, and to persuade them to spend rather than save. Quantitative easing was a way in which central banks could counteract the sharp contraction in private credit creation by commercial banks. | The measures taken during the slump were appropriate at the time. Low interest rates were designed to reduce borrowing costs for companies and individuals, and to persuade them to spend rather than save. Quantitative easing was a way in which central banks could counteract the sharp contraction in private credit creation by commercial banks. |
| But that was eight years ago. As Claudio Borio, the head of the monetary and economics department at the Bank for International Settlements, noted back in 2011, the certainties of the “Great Moderation” – the pre-crisis years when growth was strong and inflation stable – are gone. Central banks, Borio noted, were sailing in uncharted waters. | But that was eight years ago. As Claudio Borio, the head of the monetary and economics department at the Bank for International Settlements, noted back in 2011, the certainties of the “Great Moderation” – the pre-crisis years when growth was strong and inflation stable – are gone. Central banks, Borio noted, were sailing in uncharted waters. |
| There are three big charges that Mark Carney will face when he gives evidence to the Treasury committee. The first is that monetary policy has only really worked by raising asset prices, and by doing so has widened the gap between those who own shares and houses and those that don’t. The Bank has always argued that the poor would have been even worse off had it not slashed interest rates and used QE, because the recession would have been deeper and unemployment higher. | There are three big charges that Mark Carney will face when he gives evidence to the Treasury committee. The first is that monetary policy has only really worked by raising asset prices, and by doing so has widened the gap between those who own shares and houses and those that don’t. The Bank has always argued that the poor would have been even worse off had it not slashed interest rates and used QE, because the recession would have been deeper and unemployment higher. |
| The second charge is that unconventional monetary policy has led to misallocation of capital on a grand scale. One explanation for the UK’s woeful productivity record since the financial crisis is that too many poorly-performing companies have survived courtesy of ultra-low interest rates while growing firms have been starved of investment. | The second charge is that unconventional monetary policy has led to misallocation of capital on a grand scale. One explanation for the UK’s woeful productivity record since the financial crisis is that too many poorly-performing companies have survived courtesy of ultra-low interest rates while growing firms have been starved of investment. |
| Finally, and perhaps most importantly, there is the charge that by keeping unconventional measures in place for too long, the Bank of England has helped create the conditions for the next crisis and will lack the firepower to deal with it when it comes. | Finally, and perhaps most importantly, there is the charge that by keeping unconventional measures in place for too long, the Bank of England has helped create the conditions for the next crisis and will lack the firepower to deal with it when it comes. |
| Whether the inquiry leads to any changes in policy remains to be seen. It certainly should. Monetary policy has been hyperactive while fiscal policy – tax and spending – has been sucking demand out of the economy. | Whether the inquiry leads to any changes in policy remains to be seen. It certainly should. Monetary policy has been hyperactive while fiscal policy – tax and spending – has been sucking demand out of the economy. |
| The theory behind austerity was that monetary stimulus would generate the growth and the tax revenues to enable the government to fix the hole in the public finances. Instead of taking advantage of historically low interest rates to borrow for much-needed public investment, George Osborne relied on the Bank to stimulate growth through private borrowing. The conclusion the select committee should reach is that this unbalanced approach didn’t work last time and it won’t work next time either. | The theory behind austerity was that monetary stimulus would generate the growth and the tax revenues to enable the government to fix the hole in the public finances. Instead of taking advantage of historically low interest rates to borrow for much-needed public investment, George Osborne relied on the Bank to stimulate growth through private borrowing. The conclusion the select committee should reach is that this unbalanced approach didn’t work last time and it won’t work next time either. |