Raising Interest Rates Would Hit Economy Too Hard


November 2015

Raising Interest Rates Would Hit Economy Too Hard

The Bank of England's Deputy Governor has rejected claims that interest rates should be raised in order to combat the problems in the UK's housing market.

Dame Nemat Shafik told BBC's Radio 5live that the rest of the economy would be hit too hard by such a move. However, she went on to say that there are other ways in which the Bank of England can tackle this issue.

She said:

"We should use other tools, and fortunately we have other tools."

The Bank's inflation report was released on Thursday and its contents led many analysts to delay their prediction of when interest rates will be raised.

Dame Shafik went on to point out that the Bank still had the option of lowering interest rates even further if they needed to.

Recent research conducted at the institution estimated that if they had risen interest rates by 2% before the financial crisis, household debt may have been lessened by 2% but economic growth would have fallen by 2.6%.

Nemat Shafik pointed to this analysis as evidence that other methods should be used to help deal with the housing markets.

"We have an FPC Financial Policy Committee , which works alongside the MPC Monetary Policy Committee . It has tools to do things like put limits on the amount of indebtedness that households can take on, it can reduce banks' ability to lend very risky loans, so for us we need to use the right tools for the right problem."

She went on to say that although household debt is still high, it has improved a lot since the financial crisis.

"It used to be about 155% at the time of the crisis, and it's come down to 135%. It's plateaued recently, but we do think it has improved."

The Monetary Policy Committee (MPC), which Dame Shafik is a part of, voted 8-1 to leave interest rates at 0.5%- the level they have been at for six and a half years.

"Just last month, we looked at this again and we said that actually we do have room to lower interest rates if we had to and we could do more quantitative easing if we had to and in fact the governor's letter to the chancellor this month explains precisely that.

"But the fact of the matter is: at the moment we don't need any more ammo, because the economy is growing above trend. But what we have said is that we have it there if we need it."

"My children... tease me relentlessly: you meet all the time, you work so hard, you read all those papers, you look at all that data and then you decide to do nothing," she said.

"My response to that is every month we meet we pore over the data and we argue and we analyse and it's a big decision and we make that decision with huge amounts of care and thoughtfulness and making a decision to keep rates steady is just as difficult a decision to raise or lower rates."