CPS urges return to “normal” monetary policy

23 Jan 17

The Bank of England should end its extraordinary policies of ultra low interest rates and quantitative easing immediately, according to the Centre for Policy Studies think-tank.

At its last monetary policy meeting, the bank kept interest rates at their record low of 0.25% and voted to maintain an expanded programme of quantitative easing, whereby the bank creates new money electronically to buy financial assets, such as government bonds.

But in a report published by CPS today, Brian Sturgess, managing editor and chief economist at analysis firm World Economics, argued the measures are having severe economic consequences.

“It’s time to grow up,” he concluded. “The status quo cannot and should not continue, whether for economic or political reasons.

“Monetary policy should return to normal. This will expose today’s politicians to difficult decisions, but failure to change direction will only, eventually, result in even greater pain.”

Sturgess posited that the unconventional policies currently in place expose the UK economy to greater risk while failing to stimulate economic growth or reduce deflationary pressures as they intended.

In another economic downturn, Sturgess stressed there would be few options for central banks like the BoE to exploit, other than more quantitative easing.

He also said the BoE’s current policies have misallocated capital, encouraged ‘zombie capitalism’ and the rebuilding of corporate balance sheets ahead of productive investment, mispriced risk and obliged pension funds to invest in low-yielding government bonds, exposing them to significant risk should interest rates rise sharply in future.

In addition, they have boosted asset prices, particularly with regard to share and house prices. In doing so, Sturgess argues the BoE has rewarded the already wealthy while punishing savers on lower incomes.

This has helped to garner the deep-seated sense of unfairness and inequality prevalent across many western economies, he continued.

As well as calling for the immediate abolition of the BoE’s unconventional policies, Sturgess suggests it is time to reconsider the independence afforded to central banks in light of the “unprecedented and unsupervised monetary experiments” many have undertaken since the crisis.

Across the channel, for example, the European Central Bank has also come under fire for its interest rate and quantitative easing policies, which sidestepped a law prohibiting direct fiscal aid to member governments and were met with fierce objections from Germany.

The eurozone’s strongest economy continues to resent the ECB’s measures, which they say hit German savers and damage the country’s economy.

A recent survey of economists in Europe found that many believe the effects of such policies could lead to significant changes to central bank independence in the future.

The US Federal Reserve is the first to start normalising its monetary policy by announcing a small rise in interest rates – a step Sturgess said he hopes will start the process around the world.

Sir Martin Jacomb, deputy chair of Barclays Bank and chair of Canary Wharf Group, wrote the foreword to the report, in which he said: “The idea that credit should be cheap, that savings are pointless and that borrowing levels do not matter, is contrary to common sense.

“Harm is being done to individuals, to businesses and to the next generation.”

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