AS THE Bank of England lowered its base rate to 0.25 per cent and announced an extra £60 billion of quantitative easing on Thursday, governor Mark Carney said he was prepared to “take whatever action is needed to achieve its objectives for monetary and financial stability”.
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Everything, that is, except it seems talk up the economy.
If the previous governor, Mervyn King, had a reputation as a bit of a misery guts, his Canadian successor sounds like more like Leonard Cohen on a bad day.
It is alright Carney now trying to tell us now that Britain will avoid recession – but it isn’t what he said before the referendum.
Addressing the Treasury select committee in May he said that a vote for Brexit could lead to a ‘technical recession’.
He also warned before the vote that a Leave vote would lead to soaring mortgage costs (in fact they have fallen).
Carney doesn’t seem to appreciate the power his words have. They can and do move markets.
If there is a confidence problem in the UK economy at the moment it has a lot to do with the gruesome warnings which he – along with George Osborne and David Cameron – made about Brexit in the run-up to the vote.
The decision by him and other members of the Monetary Policy Committee to reduce interest rates to the lowest level ever doesn’t help build confidence. It does the opposite – giving the impression of panic.
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Historically, the act of lowering interest rates was used as a tool to encourage individuals and businesses to borrow more, in order to stimulate the economy.
But with interest rates already at a 400 year low of 0.5 per cent, no-one can claim that the price of debt was putting people off spending.
What lowering rates even further does do is to cut the income of people, especially pensioners, who are already struggling to live on meagre returns from their savings. Lower rates also help to undermine company pension schemes.
By lowering the yield on gilts and bonds the bank has, according to one estimate, increased by £70 billion the reserves which companies need to meet their pension liabilities.
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Had Carney really wanted to rebuild confidence in the economy he might be thinking of raising rates from the level they were set in the depths of the 2008/2009 financial crisis.
A base rate of 0.5 per cent was only ever supposed to be an emergency measure.
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Lowering it further seems to suggest things are even worse now than they were then – when actually our banks are not going bust as they were then and the economy expanded in the second quarter by an unexpectedly robust 0.6 per cent.
