It should not be a surprise that the economic recovery is finally underway thanks to the Bank of England’s polices but the bank’s policy interventions do not remove the need for a rebalancing of demand, the Bank of England’s outgoing deputy governor for financial stability, cautioned.
Speaking at the annual conference of the Association for Financial Markets in Europe today (24 September), Paul Tucker said that ‘forward guidance’ can be particularly useful during a period when the recovery is beginning to kick in.
In August, the bank announced ‘forward guidance’, stating that interest rates would remain at the historical low level of 0.5 per cent for the next two years, but if unemployment dropped below 7 per cent or if there were changes to the CPI inflation, the rate was subject to change.
Mr Tucker said: “Saying more about the committee’s approach to policy in this way might be particularly valuable during a period when signs of recovery have become more apparent.
“These are conditions in which it would be very easy for the financial markets, businesses and households to jump to the mistaken conclusion that monetary stimulus will soon begin to be withdrawn. Given the slack in the economy, the committee is not in a rush.”
Mr Tucker cautioned that while forward guidance can forestall avoidable uncertainty about the Monetary Policy Committee’s reaction function, it does not affect the greater uncertainty about the evolution of the recovery.
He added that it “should not be a complete surprise” that recovery is finally underway, drawing attention to various “Keynesian” policies designed by the bank to stimulate the economy.
Mr Tucker commented that in addition to the “massive amount” of monetary stimulus, the bank’s various liquidity schemes – the Funding for Lending Scheme, the Extended Collateral Term Repo scheme and the Discount Window Facility – have eased conditions in bank funding markets.
In light of this, the bank’s Financial Policy Committee has been able to recommend a relaxation of liquidity standards for banks, he said.
However, he cautioned that the bank’s policy interventions do not remove the need for a rebalancing of demand, highlighting that the UK economy entered the crisis “with too much debt in banking, in the household sector, in government and, for the nation as a whole, externally”.
Mr Tucker concluded his speech by emphasising the need for the MPC to avoid misconceptions about the likely course of policy.
He said: “But by adopting a probing approach and maintaining an eclectic approach to its assessment of the outlook, the MPC has the wherewithal to provide broadly the right degree of stimulus without risking, or diluting its commitment to, price stability.”
In June Mr Tucker announced that he will be stepping down from his role following three decades at the bank. Sir Jon Cunliffe is his replacement and will be taking up the role from 1 November.
