QE is here forever, says Bank of England deputy governor
Quantitative easing is
here to stay as a standard tool of central bankers, according to the
Bank of England’s deputy governor Minouche Shafik.
Interest rates are likely to stay relatively low permanently, she said, because of structural and demographic changes in the world economy, and that means central banks have to use other means to ease monetary policy – including QE, whereby the Bank of England creates money and buys bonds. “Deep structural forces have combined to depress the level of interest rates at which the economy would be in equilibrium, obliging us to rely ever more on monetary policies that were once considered unconventional,” said Ms Shafik, speaking at a Bloomberg conference.
Interest rates are likely to stay relatively low permanently, she said, because of structural and demographic changes in the world economy, and that means central banks have to use other means to ease monetary policy – including QE, whereby the Bank of England creates money and buys bonds. “Deep structural forces have combined to depress the level of interest rates at which the economy would be in equilibrium, obliging us to rely ever more on monetary policies that were once considered unconventional,” said Ms Shafik, speaking at a Bloomberg conference.
The deputy governor, who is leaving the Bank to head up the London School of Economics, said that interest rates have been at around 5pc for centuries, but she cannot see the base rate returning to that level any time soon.
The neutral rate of interest “is closer to zero than it used to be. You can see from charts that historically, interest rates have always been at around 5pc, going back hundreds of years… even in ancient Babylon,” she said.
“Something has changed in the last decade with big forces of demography, global savings and investment, and the neutral rate has fallen and is likely to stay low for a very long time.”
As interest rates are going to stay low, central banks need other tools to stimulate the economy, with QE foremost among those.
Ms Shafik said that she had initially expected to start unwinding QE once interest rates rose to around 2pc – but instead of hiking, the Bank of England cut its base rate to a new record low of 0.25pc last month.
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“There is no doubt in my mind that the UK is experiencing a sizeable economic shock in the wake of the referendum. Any reduction in openness or need to reallocate resources will necessarily imply a slower rate of potential growth for the economy,” said Ms Shafik, noting a hit to business investment as well as flows of foreign funds into the country.
“It seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.”
Any such change is less urgent than initially expected, however, as the economy is holding up surprisingly well following the vote.
“The welcome improvement in the forward-looking indicators suggests that the slowdown may not be as sharp or as sudden as we might have feared,” she said
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