Yahoo Finance 'Extreme' steps may be needed to fight next recession, MPs warned
The UK will be forced to take radical steps to fight the next recession if the current recovery fails to gain traction, building societies have warned.
MPs risk being pushed towards “extreme” policy measures to support the economy, including tearing up the Bank of England’s current 2pc inflation target or launching a massive fiscal stimulus as traditional responses become less potent, the Building Societies Association claims.
With interest rates at a record low of 0.25pc, the BSA said cutting the Bank Rate further towards zero in the event of a negative economic shock “risked having a detrimental effect on confidence”.
“Further rate cuts, and in particular negative rates, could be counterproductive,” it said in a submission to the Treasury Select Committee’s (TSC) inquiry into the unintended consequences of monetary policy.
“Structural reform to support sustainable growth, such that interest rates can eventually rise, is now required.”
The BSA said there was still scope to add to the Bank’s £435bn stockpile of asset purchases, or in “more extreme scenarios change the Bank’s remit, for example to target a higher rate of inflation”.
Yorkshire Building Society, the UK’s second largest mutual, also urged the Government to do more to support growth. “We would be concerned that ‘exceptional’ instruments of monetary policy are becoming the norm,” it said.
It also criticised government “interventions” including its launch of a Pensioner Bond offering preferential interest rates to the over-65s.
It said these products “skewed markets and excluded the bulk of those seeking to accumulate savings,” including first time buyers already struggling to get on the housing ladder.
Several submissions to the TSC recognised that implementing policies such as a doubling of the inflation target to 4pc – while providing more room for policymakers to respond to future crises – would be politically difficult.
“Such a move is not without costs; of being seen to change the inflationary goalposts; of setting the authorities up for failure if they can’t raise inflation further,” said Tony Yates, a professor of economics at Birmingham University.
Andy Haldane, the Bank of England’s chief economist, has suggested raising the UK’s inflation target to 4pc from the current level of 2pc as one of the radical options policymakers could deploy to fight the next financial crisis.
Responding to the TSC for the Bank, Ben Broadbent, deputy governor for monetary policy, said the central bank had plenty of ammunition to fight the next downturn.
He said there was “scope for significant further gilt purchases” through quantitative easing “if warranted”.
With £122bn of eligible corporate bonds that could also be hoovered up by the Bank, Mr Broadbent said there was also “significant scope” to expand its £10bn corporate bond purchase scheme if necessary, with these purchases deemed to “provide a greater boost to activity, pound for pound, than purchases of government bonds”.
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