Kristin Forbes is an external member of the Bank of England (BoE) Monetary Policy Committee (MPC) which sets the BoE’s official interest rate. She is one of three members who voted for a rate increase at the MPC’s most recent meeting. In a recent speech to the London Business School she wondered why so many central banks, including the BoE, had kept their official interest rates at emergency levels, nine years after the GFC?
Why so low for so long?
“Why are interest rates still near zero in so many countries even though it has been almost nine years since the peak of the crisis? Why is so much monetary stimulus still believed to be needed even as global economic growth has been above 3% for 7 years in a row and global inflation expected to pick up to about 3.5% by year end? Why are central banks so reticent to raise rates given their experience that interest rates at such low levels, especially for a prolonged period of time, can increase risks — such as fostering financial market bubbles and unsustainable borrowing, supporting an inefficient allocation of resources, and creating challenges for pension funds, savers and banks?”
Other factors at play
“In fact, in my view, a simple assessment of key variables suggests that although the UK may still require some support from monetary policy, the substantial amount that is in place today is not currently warranted by standard economic measures. It is increasingly difficult to make the case that fundamental economic weakness … is the main reason why it has been so hard to increase interest rates at all from emergency levels in the UK. There must be other factors at play.”
“It is also worth noting that by the simplistic measures on these graphs, the UK economy is more clearly positioned for a tightening cycle than the US, at least relative to past decisions.”
“Do the same factors preventing a “lift-off” then still explain the MPC’s majority decision last week to keep interest rates constant? Can these factors justify a continuation of the full stimulus package announced last August?”