Britain would be a significantly poorer country without deep cuts in interest rates and the Bank of England's emergency injection of £375bn into the economy through its controversial quantitative easing (QE) programme, one of the Bank's leading policy makers has said.
Andrew Haldane, executive director for financial stability, admitted that some Britons had done far better out of QE than others, but said most people had benefited from an expanding economy and rising asset prices.
Defending the Bank against the charge that its actions were exacerbating inequality, Haldane said the solutions to the growing gap between rich and poor were redistribution and changes to corporate governance that would make businesses more long-termist in their outlook.
"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 said inequality appeared on central banks' radar during the course of the financial and economic crisis of 2007 to 2009, sometimes flashing red.
"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 said it was impossible to be certain how the economy would have performed had interest rates not been cut to 0.5% and electronic money not been created through QE.
"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 harder, Haldane said, to measure how monetary policy had affected asset prices, such as the value of shares and property. But the facts are striking. Equity prices are almost 90% higher than in 2009, when QE began in Britain.
Corporate bond prices are more than 40% higher and government bond prices 15% higher. In other words the wealth, as well as the income pie would most probably have been materially smaller without extraordinary monetary stimulus.
Haldane said the Bank's reflationary policy had meant that some people had received bigger shares of income and wealth.
Relative winners included debtors, whose borrowing costs collapsed, while relative losers were likely to be savers reliant on bank deposits for income, because of falling bank deposit rates.
"But these relativities need to be seen against the backcloth of a rising, not retreating, income and wealth tide. The majority of people – savers and borrowers, old and young – 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."
theguardian.com
Andrew Haldane, executive director for financial stability, admitted that some Britons had done far better out of QE than others, but said most people had benefited from an expanding economy and rising asset prices.
Defending the Bank against the charge that its actions were exacerbating inequality, Haldane said the solutions to the growing gap between rich and poor were redistribution and changes to corporate governance that would make businesses more long-termist in their outlook.
"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 said inequality appeared on central banks' radar during the course of the financial and economic crisis of 2007 to 2009, sometimes flashing red.
"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 said it was impossible to be certain how the economy would have performed had interest rates not been cut to 0.5% and electronic money not been created through QE.
"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 harder, Haldane said, to measure how monetary policy had affected asset prices, such as the value of shares and property. But the facts are striking. Equity prices are almost 90% higher than in 2009, when QE began in Britain.
Corporate bond prices are more than 40% higher and government bond prices 15% higher. In other words the wealth, as well as the income pie would most probably have been materially smaller without extraordinary monetary stimulus.
Haldane said the Bank's reflationary policy had meant that some people had received bigger shares of income and wealth.
Relative winners included debtors, whose borrowing costs collapsed, while relative losers were likely to be savers reliant on bank deposits for income, because of falling bank deposit rates.
"But these relativities need to be seen against the backcloth of a rising, not retreating, income and wealth tide. The majority of people – savers and borrowers, old and young – 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."
theguardian.com
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