'Regions would have faced contraction' without rate cuts and money printing
BRITAIN’S poorest regions would be worse off if the Bank of England had not cut interest rates or introduced its money printing scheme following the financial crisis, its chief economist has said.
Andy Haldane defended the Bank’s monetary policy stance, saying that it has benefited households across the country, including its worst off regions like Wales and the North East.
“Without the support of looser monetary policy, all regions would then have experienced a contraction in real GDP (gross domestic product) per head since 2008,” Mr Haldane said in a speech to the Materials Processing Institute in Redcar, North Yorkshire.
“This contraction would have been large, averaging 7%, equivalent to an annual average income loss of £1,600 per person. Here in the North-East, the loss in annual income for the average household would have been similar in magnitude,” he added.
In reaction to the financial crisis, the Bank of England lowered interest rates from 5% to 0.5% between September 2008 and March 2009, the lowest rate in the central bank’s 300-year history.
It also embarked on a £375 billion quantitative easing (QE) programme, which saw the Bank print money to buy assets like government bonds from private holders to stimulate the economy.
Had the Bank not taken action, unemployment would have risen by an additional 4 percentage points, leaving an extra 1.5 million people out of work, Mr Haldane said.
It would have left the North East with a jobless rate of over 10%, with an extra 50,000 people unemployed.
“That is the equivalent to losing nearly seven Nissan factories,” Mr Haldane added.
The Bank has since embarked on further easing, ramping up its QE programme by £60 billion to £435 billion and cutting interest rates to a record low of 0.25% in August as part of a post-Brexit stimulus package.
While it is “too early” to determine what impact that stimulus will have on activity and unemployment, the Bank’s model suggests activity could rise 0.5% over three years and support an extra 100,000 jobs.
“In an environment of heightened uncertainty about future growth and jobs, these gains are not to be sniffed at.”
But the chief economist acknowledged that monetary easing may have benefited some more than others since 2008, with higher wealth regions like the South East benefiting more than poorer areas since the crisis.
“Even if monetary policy has lifted all boats, and could plausibly do so again if needed, that does not mean it has done so equally.”
Prime Minister Theresa May railed against the Bank’s monetary policy at a the Conservative Party conference in October, saying it has disproportionately hurt savers while benefiting the asset-rich.
However, he pointed to research by Bank colleagues which found no evidence of inequality having increased since it embarked on looser monetary policy.
Their research also found that asset portfolio growth has offset the direct loss of income as a result of lower interest rates for savers, pensions funds and pensioners.
Mr Haldane said: “It is clear monetary policy has played a material role in lifting all boats since the financial crisis broke. Indeed, without it, it is plausible to think the vast majority of regional boats would have sunk.”