Bank ill-equipped to navigate uncertain future

The Bank of England will announce its latest interest rate decision later today. The monetary policy committee, including departing Deputy Governor Charlotte Hogg, is expected vote to keep rates just above zero.

Mark Carney says that growth has remained resilient since the EU referendum. But with so much uncertainty on the horizon; including elections in Europe, the Brexit negotiations and a referendum in Scotland, there’s growing concern that the Bank is out of ammo if things go south.

Since 2008, the Bank has navigated the aftermath of the financial crisis by cutting interest rates and expanding its QE programme. These policies may have helped avoid the complete collapse of the UK’s financial system, but they’ve been ineffective at stimulating a balanced recovery in the real economy. QE has also exacerbated wealth inequality.

In the event of a future downturn, the Bank no longer has these options, and its ability to stimulate economic activity in the real economy will be even more limited. It can’t cut rates because they’re already at a historic low, and Governor Mark Carney has ruled out cutting rates below zero. And it has already inflated asset prices by pumping £445bn into financial markets through quantitative easing.

We rely on the Bank to stimulate aggregate demand and respond to economic shocks. When it’s unable to do so, the risk to the economy is very serious. Events which would otherwise amount to a short-term fluctuation can result in a prolonged recession.

The root of the problem is that given today’s situation the Bank cannot keep demand and real economic activity at its desired level in a balanced and sustainable way.

It’s only a matter of time until the next financial shock, and the Bank will not have the necessary ammunition to respond. To fix this problem, the Government should give the Bank new tools, that will allow it to put money directly into the real economy.