The Bank of England has admitted that its post-financial crisis policy of quantitative easing (QE) has contributed to lower levels of investment and productivity in the UK economy in recent years.
The bank said the deficits that have built up in company pension schemes have coincided with the fall off in the level of business investment in the economy in the same time period.
Companies that have been forced to pay more cash into pension schemes have invested less, which hits the level of investment those companies make in the wider economy.
Lower levels of investment in the economy hit productivity because machinery is not upgraded so the latest technology is not used.
QE affected pension deficits because the attendant low interest rates mean the returns pension funds earn from investments in bonds and cash fall, contributing to the creation or expansion of the deficit.
The central bank estimates that QE caused the yield on UK government bonds to fall by 1 per cent.
However the Bank of England said it believes the impact on the economy has been minor, because investment levels would have been lower still if it had not used quantitative easing to stimulate economic activity, boosting economic growth.
The working paper was produced for the central bank by Philip Bunn, senior economist at the Bank of England, Paul Mizen, a professor of monetary economics at Nottingham University, and Pawel Smietanka, an economist at the Bank of England.
It highlighted that higher pension deficits reduced UK GDP by 0.1 per cent since 2007, less than the positive impact on GDP it believes QE has had on the economy since then.
The central bank added that the main reason the impact on business investment has not been starker is that pension deficits have been allowed to grow.
John Chatfeild Roberts, a fund manager at Jupiter has long taken the view that QE has the opposite effect to that which was intended by policy makers, primarily by contribution deflation to the economy rather than inflation.
The Bank of England lifted interest rates in November 2017, and recently said rates are likely to rise at a faster pace than the market had expected.
David.Thorpe@ft.com
