Creative solutions are needed from the MPC to-restart growth – ITEM Club comments on today’s interest rate decision

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Nida Ali, economic advisor to the EY ITEM Club, comments on today’s interest rate decision:

  • Although we didn’t expect any surprises today, there is ample evidence that the growth outlook is worsening
  • Last month’s minutes hinted that more QE may be on the cards, but we remain unconvinced that will tackle the problem
  • The MPC needs to devise more creative ways of loosening policy and promoting growth

“After last month’s decision to restart the asset purchase programme, there was little chance of any further moves today. However, business surveys suggest that the economy is heading for another soft patch, as domestic demand is weak while external developments are taking a toll on trade. MPC members’ concerns about the growth outlook are no doubt growing steadily.

“Developments in the Eurozone are becoming increasingly concerning and last month’s minutes strongly hinted at the possibility of more QE in the event that downside risks to growth materialise. However, we are not convinced that, in the current circumstances, this is the best way of tackling the problem. Gilt yields are already depressed at all-time lows and are unlikely to fall much further, while the scale of uncertainty will prevent asset prices from rising. Even if the transmission channels work as intended and this extra money does find its way onto the balance sheets of large companies, we think they would be more inclined to hoard it rather than spend it on investment.

“With numerous headwinds buffeting the economic outlook, the MPC needs to devise more creative solutions of loosening monetary policy and promoting growth. For instance, there is no reason why 0.5% should represent the lower bound for the official Bank Rate. The floor for the equivalent Fed Funds rate in the US is 0-0.25% and the actual rate has been closer to the floor than the ceiling. Although this will hit individuals’ savings, it will go a long way in easing the pressure on borrowers, especially those on tracker mortgages, and help to improve the situation for the squeezed consumer.”