With Theresa May suddenly catapulted into Number 10, the world of finance is trying to calculate what the new government means for the management of the UK economy.
Before the dramatic events unfolded, the soon-to-be PM hinted that a government under her leadership might adopt a different approach towards monetary policy. In a Times article calling for “an economy that works for everyone”, she wrote
“Monetary policy – in the form of super-low interest rates and quantitative easing – has helped those on the property ladder at the expense of those who can’t afford to own their own home.”
Theresa May becomes the highest-profile UK politician to confirm what is now widely recognised by economists and financial institutions: The Bank of England’s policies of ultra-low interest rates and quantitative easing have contributed to inequality.
It remains to be seen whether Theresa May is an opponent of loose monetary policy altogether, or whether she might favour monetary stimulus of a different form. While the original quantitative easing programme was mainly used to buy government bonds from private investors, it’s possible that a future asset purchase programme could involve a more diverse range of assets. The ECB has recently started buying corporate bonds, and bonds issued by the European Infrastructure Bank.
But might the new prime minister have something even more radical in mind? She also suggested that government-backed project bonds could be used to boost infrastructure. Could newly-created central bank money be used to finance the purchase of these bonds?
Either way, any change in approach to monetary policy under a May government will soon be revealed. While the Bank of England’s Monetary Policy Committee did not vote in favour of new stimulus measures on Thursday, Mark Carney has indicated that the committee is likely to favour monetary easing in the future. Markets now expect the MPC to cut interest rates in August, and many predict a further round of quantitative easing before the end of the year.
Will the Bank change course under Prime Minister May? We’ll soon find out.
Stay in touch
Trackback from your site.