In her closing speech to the Conservative Party conference Theresa May suggested monetary policy from the Bank of England was doing more harm than good.
“Because while monetary policy – with super-low interest rates and Quantitative Easing – provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects,” she told the conference hall.
“People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer. A change has got to come. And we are going to deliver it.”
Is she right about the effect of loose monetary policy?
It’s no secret that Quantitative Easing (a fancy name for money printing) by the Bank of England boosts asset prices. Indeed, that is one of the goals.
The Bank hopes that by boosting the price of assets that firms and households will have more confidence to invest - and that this investment will boost GDP growth.
And it’s also no secret that the distribution of assets in the UK is extremely unequal.
The most recent Wealth and Assets Survey from the Office for National Statistics suggested that in 2014 the richest 1 per cent of households had 13 per cent of the entire wealth of the nation, equal to the combined share of the poorest 57 per cent.
And this is almost certainly a large under-estimate due to the fact that survey measures of household wealth are known to be inaccurate when measuring the wealth of the richest.
The Bank of England itself produced a much-cited piece of research four years ago in which it pointed out this inequality, and noted that its QE programme, by boosting all asset prices, will have had very unequal distributional affects across society.
The former Chancellor George Osborne summed up the effect in an interview last month when he said “essentially it makes the rich richer”.
What about low interest rates?
These are also understood to boost asset prices, thus contributing to higher inequality. But the main charge against low rates is that they have penalised savers, primarily the old, while benefiting mortgage borrowers, who are younger.
Theresa May hinted at this common criticism in her speech when she said that borrowers “have found their debts cheaper”.
But this is much less clear cut than often presented by savers' lobby groups, particularly in relation to the cross-generational impacts.
Older people, as well as having cash savings with low returns, will very often have other assets such as housing, which will have been boosted by low interest rates and QE.
The value of their pension pots will also have been lifted.
Economists argue that the major losers from low interest rates are actually young people, since low rates make it much harder for them to save up for a comfortable retirement.
Does this mean QE has done more harm than good?
They key issue here is the counterfactual.
How much worse would the economy have been if the Bank of England had not cut interest rates massively in 2009 and bought some £400bn of UK Government bonds as part of its QE programme?
The Bank is clear that things would have been considerably worse, that the recession would have been much deeper, the subsequent recovery weaker and unemployment higher.
But is it time to stop it?
That’s certainly not the Bank of England’s view.
The Bank’s Governor, Mark Carney, and its chief economist, Andy Haldane, have both recently said that if the Bank had not cut rates again in August to 0.25 per cent and increased QE by another £70bn the economy would be slipping into recession and unemployment would be rising.
The Bank has also said it may well cut rates again later this year.
However, the Bank had also stressed that there are limits to what monetary policy can achieve – and it acknowledges some of the adverse side-effects of its monetary stimulus.
This can be read as a signal that it would not be unhappy if Government fiscal policy took up more of the stimulus slack – something that the new Chancellor Philip Hammond is clearly planning with his talk this week of a boost to infrastructure spending in the 23 November Autumn Statement.
Is Theresa May now going to tell the Bank of England what to do?
That is one possible reading of her “a change has got to come” phrase.
But although Ms May used to work at the Bank of England for six years at the outset of her career in the 1970s and might fancy she knows how it's done, it seems rather unlikely she wants to turn the clock back and start setting monetary policy from Downing Street.
Revoking the Bank’s independence – or even leaning on Threadneedle Street heavily to influence its decisions – would be a potentially very dangerous move that could jeopardise financial stability at a sensitive time (not least due to the uncertainty created by Brexit).
One should not rule anything out given Ms May's boldness in office thus far, but it seems more likely that the Prime Minister was reinforcing the message that she will allow fiscal policy to take up more of the strain of supporting the UK's growth from now on, letting the Bank of England take a well-earned breather.Reuse content