Bank of England director defends low interest rates and quantitative easing
The UK would be in a substantially worse position financially and have a far larger contingency of poor people if the Bank of England did not pump £375 billion into the economy through quantitative easing and slash interest rates to their record low of 0.5%, one of the Bank of Englandís key policy markers has identified.
Andrew Haldane, executive director for financial stability at the Bank, conceded that some British people had benefitted far greater from quantitative easing than others, but argued that the universal impact that it has had across the UK has seen the majority of people benefit from the improvements it has made on the economy and the price of houses in the UK.
Haldane was defending the Bankís conduct against recent criticisms levelled at them that their quantitative easing policy had widened the wealth gap in the UK been the high and low earners and called for reform to the corporate governance procedure in order to enable companies to broaden their scope to a long term picture and subsequently use this new found stability in the business world to narrow the wealth gap in the country.
"Inequality is emerging after a half-century in the wilderness," Haldane said in a speech in Bristol made earlier this month and released by the Bank on Thursday. "The surprise may be that it has taken so long."
He highlighted that the problem of economic inequality was first considered by the BOE back in 2007 and they have continued to keep this in mind in recent times when considering the implementation of new policies.
"That is because, at least over the shorter-term, central bank policies can and probably have reshaped patterns of inequality. Some have gone further, arguing that central bank policies of extraordinary monetary accommodation have, by boosting asset prices and wealth, exacerbated inequalities."
Haldane argued that it was supremely difficult to know for sure what trajectory the countryís economy would have taken had the Bank not opted to slash interest rates to their historic low of 0.5% and pump a plethora of electronic money into the economy through quantitative easing.
"But it seems near certain the economy would have been materially smaller, and asset prices materially lower, had this action not been taken. On the Bank's own estimates, the UK economy today would have been at least six percentage points smaller without the combined effects of lower interest rates and large doses of QE. Or, in money terms, we as a nation would have been perhaps £80bn to £100bn poorer. The income pie would have been materially smaller."
It was even more difficult to gauge the impact that the Bankís monetary policy has had on property price, Haldane argued, even though the figures which describe both equity prices, government bond prices and government bond prices have all risen by 90%, 40% and 15% since the implementation of quantitative easing back in 2009. This implies that the stimulus programme introduced by the Bank of England has had a direct impact on the price of properties and has helped a number of people build up their wealth through careful management of their property.
Haldane argued that the BOEís reflationary policy had resulted in certain individuals obtaining larger shares of income and wealth than others, with the big winners being those who had already amassed a considerable amount of debt prior to 2009 who then saw the costs of their borrowing fall steeply after the new stimulus programme was introduced. Conversely, savers were identified as the group of people most negatively affected by the Bankís policy, as it has led to an extended period of torridly low rates being applied to new saving account products by both banks and building societies.
"But these relativities need to be seen against the backcloth of a rising, not retreating, income and wealth tide. The majority of people ñ savers and borrowers, old and young ñ appear to have been made better off absolutely as a result of extraordinary monetary measures.
"Of course, some of the losses may be more visible than the gains and some of the relative losers more audible than the gainers. For example, low yields have reduced annuity rates for some pensioners, lowering income streams.
"But those same low yields have boosted asset prices, raising the value of pension pots. The net effect appears on average to have been positive. And extraordinary monetary measures will of course not last forever. When they unwind, so too will any distributional effects. In others words, central banks' influence on income and wealth shares is likely to be temporary.