Faced with a weakening economy and deep uncertainty, the Bank of England has unveiled its response. It is, some might say, a package of measured stimulus to calm apprehension. Further injections may follow.
You could say the same about crack cocaine addiction. And that, I fear, is where we are at with UK monetary policy.
This initial boost might seem like a cure. But be wary of forecasts over supposed curative effects. The fact is that no-one knows – and especially not a Bank governor who has a wayward record in forecasting. We have pushed further into uncharted territory for which there is no precedent.
Interest rates have now been cut to a record low of 0.25 per cent. Further monetary stimulus is planned over the next six months, with an extra £60 billion of Quantitative Easing over the next six months, taking the total to £435bn. And there is a new £10bn Term Funding Scheme to reinforce the passing through of the cut in Bank Rate to the borrowing rates actually faced by households and firms.
This smorgasbord of stimuli was garnished with suggestions of further easing ahead, with Carney repeatedly stating that all parts of the package could be expanded, raising expectations of a further rate cut this autumn. Indeed, the minutes included the view that “if the incoming data proved broadly consistent with the August Inflation Report forecast, a majority of members expected to support a further cut in Bank Rate”.
Good luck with all this. But I’m sceptical. Back in 2008-09 we embarked on the path of ultra low interest rates and effective money printing. We were told these were emergency short-term measures to kick start recovery after the global financial shock.
But here we are, eight years later with a fitful recovery at best, a colossal trade deficit and a government debt pile that has ballooned from £600bn before the crisis to more than £1,600bn.
And well before the referendum vote to leave the European Union, the economy, both in Scotland and across the UK, was slowing. If the resort to such “emergency short-term measures” did not fix our problems then, what gives us any assurance that more of the same will work this time around?
The problem now is not a financial crisis, or the cost of money or its availability. It is centrally to do with business and household confidence. The combination of Brexit uncertainties, a weakening oil price with the prospect of further cutbacks in exploration and development in the North Sea, and a dearth of major infrastructure projects cannot be made good by cuts in interest rates – even down to 0.1 per cent as some are predicting for later this year.
The hope is that businesses large and small will come to terms with the fact that the outcome of Brexit negotiations – when they do finally start – are unknowable in advance. But that is likely to take time. And for the moment the mood music across large sections of the commentariat is strongly negative.
So while the Bank has taken stronger and broader action than expected, with fiscal loosening likely in the Autumn Statement, there is no certainty that this further foray into emergency terrain will work. Indeed, we look set for interest rates to remain at this “ultra ultra” low level for a prolonged period. Such is the mountain of government debt, there will be no hurry to raise rates: thus we have now fallen into the classic trap of addiction – the greater the resort to crack cocaine, the more difficult it is to break the cycle of dependence.
Back in 2008-09, it was widely supposed by now that the “bazooka” emergency measures taken then would be long behind us: we would have returned to “normal” for interest rates while government borrowing would have fallen sharply.
But events have failed to conform to official predictions. And the further we leap into the dark, the more questionable the latest predictions become.
Moreover, we have in Mark Carney a chameleon Bank governor with a problematic forecasting record. When he launched his policy of so-called “forward guidance” in August 2013, it was designed to give households and businesses greater certainty about the direction of interest rates and monetary policy. Within six months this policy had to be revised.
In June 2014, he warned that investors were “insufficiently alive” to the possibility of an earlier than expected rise in interest rates. There followed pronouncements – variable as to the timing of an interest rate change, but all of them assuming the next move would be upwards. Twelve months ago he was signalling a rate increase by the end of 2015. Now interest rates have moved – but downwards.
His “forward guidance” now is for a period of above target inflation and a notably weaker economic outlook. The “good news” is that the Bank is not forecasting a recession. But it is projecting a marked hit as investment decisions are halted, whilst the productivity outlook has been downgraded sharply. It now sees growth of 1.8 per cent for this year and just 0.8 per cent next – clattering down from the 2.3 per cent estimate it made only three months ago.
So here we are, back on the crack cocaine of stimulus, the magic powder that was hailed as a cure but wasn’t, and with resort to record debt for business, households and government. Some predict the bond buying programme could hit £500 billion.
The Bank can slash the cost of credit and try and coax more lending, but it can do little to boost the demand for lending and spur spending if business and households are worried about the outlook.
Next step: bold Japan-style infrastructure spending plans in the Autumn Statement. They may have to be very bold indeed.