The long-awaited next move in UK interest rates could be down rather than up, as the third instalment of a “crisis trilogy” unfolds across the world, the Bank of England’s chief economist, Andy Haldane, has warned.
The intervention from the Threadneedle Street policymaker followed the unexpectedly cautious tone struck by the US Federal Reserve on Thursday in holding interest rates close to zero, sending tremors through global stock markets.
Mr Haldane reinforced his position as the Monetary Policy Committee’s leading dove on interest rates in a speech in Northern Ireland. He warned that recent events in China – where growth worries and a shock devaluation set off financial market turmoil last month – formed the “latest leg of what might be called a three-part crisis trilogy”.
He said: “Part One of that trilogy was the ‘Anglo-Saxon’ crisis of 2008-09. Part Two was the ‘euro area’ crisis of 2011-12. And we may now be entering the early stages of Part Three of the trilogy, the ‘emerging market’ crisis of 2015 onwards. It is simply too soon to tell how potent contagion from emerging market economies to the world economy will be.”
The potential emerging market crisis – plus the threat of persistently low inflation – means the case for raising interest rates is “some way from being made”, according to Mr Haldane. “Were the downside risks I have discussed to materialise, there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target,” he said.
So far eight of the MPC’s nine members – including Mr Haldane – are voting to keep rates on hold with only one hawkish dissenter, Ian McCafferty, advocating a rise.
Mr Haldane’s comments follow a recent succession of weaker data on the UK economy, with fading manufacturing and construction output, a surging trade deficit and sluggish retail sales growth. “While the UK’s recovery remains on track, there are straws in the wind to suggest slowing growth into the second half of the year,” he warned.
He is also “not as confident as I would like” that CPI inflation will recover to its 2 per cent target level over the next two years.
The FTSE 100 index slipped 1 per cent, European markets took a hit and shares slid on Wall Street when it opened. The Fed chair Janet Yellen spooked the market with comments that the “outlook abroad appears to have become less certain”. Most observers are now focused on December as the moment for the first US interest rate rise since 2006.
Chris Beauchamp at the spread betting firm IG Group said: “Going into the Fed meeting, talk revolved around how damaging a rate hike would be to equity markets. It turns out that no hike can also be rather problematic.”
Need negative rates? Just scrap cash…
The Bank of England could take the dramatic move of scrapping cash altogether to allow the central bank to set negative interest rates if the state of the economy made it necessary, Threadneedle Street’s chief economist has said.
Andy Haldane’s latest speech grapples with the problems faced by policymakers looking to stimulate growth with interest rates at the so-called “zero lower bound” in Western economies such as the UK, where Bank rates stand at 0.5 per cent.
Attempts to set negative interest rates on deposits – already adopted by some nations – can be avoided by converting money into physical currency, so “a more radical proposal still would be to remove the ZLB constraint entirely by abolishing paper currency”, the chief economist said.
Another alternative is to set an “explicit exchange rate” between paper money and electronically – in effect making it more expensive to use cash relative to digital money – “provided electronic money is accepted by the public as the unit of account rather than currency”.
Mr Haldane added: “Perhaps central bank money is ripe for its own great technological leap forward.”
Other solutions mooted by Mr Haldane could be to revise inflation targets upwards – giving extra “wriggle room” on rates at the risk of losing control of inflation. Making tools like quantitative easing used in times of crisis permanent also risked blurring boundaries between monetary and fiscal policy, he added.Reuse content