BOE’s Vlieghe: Downside Risks to Economy Starting to Materialise

20 October 2020

By David Barwick – LONDON (EconoStream) – Downside economic risks are apparently materialising and any change in the Bank of England’s policy stance is more likely to be toward more accommodation, Gertjan Vlieghe, external member of the BOE’s Monetary Policy Committee, said on Tuesday.

At an online webinar, Vlieghe, according to a text of his remarks made available by the BOE, indicated that the MPC was not yet ready to introduce negative rates, but that the effectiveness of such a move was under serious consideration.

The recent increase in Covid-19 cases implied a greater dampening effect on the economy, he said. ‘Indeed, it appears that the downside risks to the economic outlook are starting to materialise’, he said. ‘In my view, the outlook for monetary policy is skewed towards adding further stimulus.’

Although the BOE could increase asset purchases, a policy tool that has ‘served us well so far’, one key channel via which QE operates is expected future real interest rates, and these are already quite low, he said. That means that additional asset purchases probably wouldn’t be as effective as in March, he said.

Taking interest rates below zero has also been under discussion on the MPC, he said, citing empirical studies that suggest negative rates ‘have not been counterproductive to the aims of monetary policy.’ At the moment, the MPC is considering whether the same experience with negative rates could be expected in the UK, he said.

In any event, taking interest rates below zero, ‘if it happens’, would require that the financial system be deemed able to handle negative rates; that negative rates be seen as not inconsistent with monetary policy objectives; and that the additional accommodation be warranted, he said.

‘My own view is that the risk that negative rates end up being counterproductive to the aims of monetary policy is low’, he said. ‘Since it has not been tried in the UK, there is uncertainty about this judgement, and the MPC is not at a point yet when it can reach a conclusion on this issue. But given how low short term and long term interest rates already are, headroom for monetary policy is limited, and we must consider ways to extend that headroom.’

Monetary policy in the UK will ensure that inexpensive funding remains accessible to firms and households, and will counter any unjustified increase in financing costs attributable to market instability, he said.

Vlieghe expressed concern about the job market, calling it ‘difficult to see a scenario where all of the remaining furloughed workers are reintegrated seamlessly into the labour force.’

Although uncertainty about unemployment is ‘huge’ in either direction, he said, ‘in my view, the risks are skewed towards even larger losses, implying even more slack in the economy than in our central projection.’

With the UK Withdrawal Agreement set to expire at the end of the year, the MPC is concerned about the period during which the economy must adjust to the trade agreements that will take effect from next January 1, he said.

‘For now, it is striking that, although indicators related to aggregate consumer spending have returned to levels seen at the start of the year (even if some of that strength is temporary), indicators related to investment and employment intentions have remained quite weak’, he said.