Crisis limits power of Bank, says official

Posted on May 28, 2012

There are limits to what monetary policy and attempts to increase bank lending can achieve while the dangers of the eurozone crisis loom over investors, a member of the Bank of England’s Monetary Policy Committee has said.

Ben Broadbent, an external MPC member, pointed out that the cost of finance had risen, even for companies that did not rely on bank loans, in spite of extremely low risk-free interest rates.

    In a speech at the Bloomberg office in London, he argued that the situation reflected investors’ fears of “a rare but very bad economic shock” from the eurozone.

    High-risk premiums were impeding business investment, he said, particularly on projects that involved sunk costs such as training.

    “These are all things that can improve productivity but have risky returns and cannot be easily reversed after the event,” he said. “Heightened fears may already have been affecting the growth of UK activity, investment and productivity for some time.”

    His speech came after the International Monetary Fund urged the BoE to cut interest rates, approve more quantitative easing and do more to improve the flow of credit from banks to companies.

    Mr Broadbent said his argument did not mean domestic policy was “powerless to affect things in the interim” and said “were the (still unlikely) worst-case risks in the euro area actually to be realised, then our own monetary policy would again play its part in mitigating the impact.”

    But he concluded: “While they are both necessary and effective, these domestic interventions have their limits. It remains the case that, for the time being at least, the most important policy decisions affecting the UK are being taken in other parts of the continent.”

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