Andy Haldane says UK at risk of sharp slowdown as BoE weighs up conflicting forces of inflation from weak pound and the Brexit vote denting confidence. The Bank of England should be wary of rushing into interest rate rises to curb inflation, according to its chief economist, in a warning that the UK economy is vulnerable to a sharper slowdown next year than forecasts would suggest.
Andy Haldane said he was comfortable with the Bank’s current wait-and-see stance on borrowing costs as it weighs up the conflicting forces of a lower pound stoking inflation and the Brexit vote denting business confidence. In a bid to shore up confidence after the referendum, the Bank cut interest rates to a record low of 0.25% in August and expanded its programme of electronic money-printing, known as quantitative easing (QE). It had hinted at another interest rate cut before the end of the year but a flurry of brighter than expected economic news forced the Bank to row back on that guidance. Haldane said on Friday that economic output had outperformed the expectations of the Bank’s monetary policy committee (MPC) back in August while inflation had picked up, largely as a result of the pound’s sharp fall since the referendum, which makes imports to the UK more expensive. “That configuration now leaves me comfortable with the current stance of monetary policy, with no bias on the direction of the next move in interest rates,” he said.
In a speech to the Materials Processing Institute in the North Yorkshire town of Redcar, Haldane said GDP growth, which came in at 0.5% in the three months following the referendum, was stronger than forecast by the Bank and others. “This is welcome news. The main source of this upside news to activity has been the buoyancy of consumers. They appear to have kept calm and carried on spending on the high street, in the car showrooms and in the estate agents,” he said.
However, he joined other economists in warning that the rise in import costs could be passed on to consumers and that they would curb their spending as a result. The Bank is forecasting GDP growth will slow to 1.4% next year from 2.2% this year but Haldane said that could prove over-optimistic “I think there is still a material chance that growth could underperform relative to expectations during the course of next year – for example, if the squeeze on household incomes prompts a larger adjustment in household spending. In that event, the upside pressures on inflation would be weaker than expected,” he said.
If inflationary pressures were lower then the effectiveness of low interest rates in boosting the economy could suffer, he added. “My personal view is that this provides grounds for not proceeding too hastily with any tightening of the monetary policy stance,” Haldane said.
Following Chancellor Philip Hammond’s focus on the UK’s urgent need to improve its productivity in last week’s autumn statement, Haldane used his speech to explore regional disparities in productivity levels. He said monetary policy, as set by the Bank, had little influence on productivity. But the government’s industrial strategy could improve output per hour worked. Haldane joined other policymakers on the MPC in defending the Bank’s measures to shore up the economy in the wake of the global financial crisis after prime minister Theresa May’s remarks earlier this year that there had been “some bad side-effects” from low interest rates and QE.
He echoed the deputy governor, Ben Broadbent, in arguing monetary policy could have little influence on how prosperity is shared out in an economy. “At least over the longer run, it is reasonably clear that monetary policy is ill-equipped for the task of either expanding the economic pie or altering the way it is sliced,” Haldane said.
He also put forward Bank estimates for how the economy would have performed in the absence of QE and the Bank’s deep interest cuts from 5% to 0.5% between September 2008 and March 2009. “Without the support of looser monetary policy, all regions would then have experienced a contraction in real GDP per head since 2008,” he said.
“The picture is similar if we turn to unemployment. In the absence of a monetary policy easing, unemployment would have risen further after the crisis in every region in the UK, by an additional four percentage points. Around an extra 1.5 million people would have found themselves out of work.”
On the question of how the Bank’s policies had affected regional disparities in the UK economy, he found limited evidence of any damage.
“The regional distribution of incomes does not appear to have changed materially during the period of monetary loosening. The same is true of unemployment rates. There is some evidence of the higher-wealth regions benefiting more than the lower-wealth regions over the period since the crisis,” Haldane said.
Author – Katie Allen
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