Mark Carney, the Bank of England’s incoming Governor, needs to offer a major rethink of policy to revive UK growth prospects, said leading economists ahead of his grilling this week by MPs.
No serious move to shake the economy out of its stupor is on the cards until the new central banker takes command, according to Fathom Consulting.
“Precisely what he plans to do is unclear,” the forecaster said. “We hope strongly that it is not more of the same.
“In the absence of a major policy focused on addressing the overhang of bad debts in the UK banking system, which we feel is unlikely to happen at least until the arrival of a new Governor in July, we see little prospect of the UK breaking out of its 'new normal’.”
Fathom predicts the UK economy will grow by less than 1pc this year, staying “weak and fragile“ until banks write down their bad assets, and recapitalise.
It pointed to official figures which show that up to 8pc of mortgages are subject to forbearance where banks put struggling customers on interest-only deals, extend the terms of their loan or allow payment holidays. Fathom called them economic “zombies”.
“It is a fear that these zombies will begin to default that is discouraging banks from lending,” it said.
The forecaster’s recommendation of a change in tack came after Tidjane Thiam, chief executive of Prudential (LSE: PRU.L - news) , the UK insurance giant, warned Mr Carney that the Bank’s £375bn quantitative easing (QE) stimulus effort was “anti-growth” .
“QE is depressing savings and therefore depressing investment. This means, QE is depressing growth,” he said, as reported by The Sunday Telegraph .
Separately, the Institute of Economic Affairs’ shadow monetary policy committee (SMPC) said the Bank should raise interest rates this week, marking its first call for a rate rise since September 2011. The SMPC feared rock-bottom interest rates were leading to a “growth-destroying misallocation of capital”.
The warnings preceded Mr Carney’s inaugural appearance before the Treasury Committee on Thursday, marking an opportunity, for the first time in Britain, to hear his economic views.
As well as facing questions on the future of QE, he is expected to discuss whether the Bank’s official inflation target of 2pc should stand and what more can be done to support the recovery.
Mr Carney told the World Economic Forum in Davos last month that monetary policy was not “maxed out” and should work until economies hit “escape velocity”. However, he warned that central bankers’ could not single-handedly rescue struggling economies.