Bank of England stuck in a rut


Text of letter published in the Financial Times on 8 August 2016. Original FT Letter here.

FT Letter

Sir, The Bank of England has given us more of the same. A further cut in interest rates and an extension of the same old quantitative easing programme. As we pointed out in a recent report, the effects of QE in stimulating economic growth are debatable. What is not debatable is that QE as currently devised is a highly regressive policy that creates stock market and housing bubbles, benefits the wealthy and disadvantages poorer households. The new prime minister, Theresa May, acknowledged as much in her one and only leadership speech where she stated that “Monetary policy – in the form of super low interest rates and quantitative easing – have helped those on the property ladder at the expense of those who cannot afford their own homes.” She also promised that her leadership would be marked by efforts to reverse such policies that increase social inequality.

Yet here we are, a mere few weeks later, and the Bank of England has served up the same old tired policies that seem to be in direct contradiction to the stated objectives of the new government. The Chancellor has welcomed the move while sitting in Mrs May’s cabinet and, presumably, supporting her stated policy direction.

We have recommended that it is time that the nature and limits of central bank independence be revisited. While the Bank is doing the best it can, it has a limited armamentarium. The UK economy cannot effectively be stimulated using monetary tools alone. What is needed is much more co-ordination between fiscal and monetary policy to release more creative and imaginative policy initiatives than those that have been served up so far. None of this is possible while monetary policy remains artificially separated from fiscal and other areas of policy and delegated to the central bank without clear political accountability.

We should bear in mind that, across the world, central bank independence is the exception not the rule. There is no reason why the UK should treat it as sacrosanct especially when, as has been clear for some time, doing so results in policy that has adverse social impacts.   Joe Zammit-Lucia Trustee,

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