Rates probably need to fall further, says BoE’s Shafik

Posted on September 28, 2016

Bank of England Deputy Governor Minouche Shafik delivers a speech at a financial markets event in the City of London, in London, Britain September 28, 2016. REUTERS/Toby Melville©Reuters

Minouche Safik speaking in London on Wednesday

UK interest rates still probably need to fall further even though economic indicators are no longer in the danger zone, a deputy governor of the Bank of England said on Wednesday.

Minouche Shafik, who will leave the central bank early next year to become director of the London School of Economics, said she was likely to vote for further monetary stimulus to counter “a sizeable economic shock” from the Brexit referendum.

    As a voting member of the Monetary Policy Committee until February, Ms Shafik’s view suggests the BoE is keeping alive the option of an interest rate cut from 0.25 per cent towards zero in November if data show slowing growth.

    Ms Shafik is more willing to cut rates than Kristin Forbes, an external MPC member who last week said she was “not yet convinced” of the need for further loosening. Michael Saunders, another external member, said this month that a further rate cut might be justified because the economy could now maintain lower unemployment without generating inflation.

    The shock to the economy from the Brexit vote, Ms Shafik said, would require the UK to undergo a period of transition that would lower the longer-term growth rate.

    There was nothing the BoE could do about that, but the uncertain process of Brexit would discourage companies from investing and it was this transition problem the central bank should seek to offset, the deputy governor said.

    “It seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious,” she said.

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    Her view that another rate cut is needed came despite better than expected economic data since August that have left most indicators flashing “a little less red, a little more amber, though [they] mostly remain below average levels,” suggesting the slowdown, “may not be as sharp or as sudden as we might have feared”.

    But Ms Shafik said the BoE should act even if it was unsure how the referendum vote would affect companies and households. “Monetary policy is set in a forward-looking manner, given the lags in the transmission mechanism, and this means taking decisions even when the data cycle is at an early stage,” she said.

    Ms Shafik said the Bank was mindful of concerns that extremely low interest rates and quantitative easing were counter-productive because they added to strains on the banking system and pension funds, leading banks to curtail lending and companies to save more.

    The BoE had “minimised” the side effects in its design of policy and the MPC could best help banks and pension funds by keeping the economy stable and fostering growth, she said. Pension funds that were in balance could expect the increase in asset prices caused by QE to offset the increase in liabilities, she added.

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