Bank: Low rates cannot counter Eurozone woes
FEARS over the weak economy and the chance of a Eurozone collapse have pushed up risk premiums and hit lending to such an extent that interest rate cuts barely affect the market, monetary policy committee (MPC) member Ben Broadbent said in a speech yesterday.
This is hitting investments in areas such as research and development which are designed to boost productivity, he said, damaging the supply side of the economy and so the long-term growth outlook.
In response to the financial crisis and recession, the Bank of England cut interest rates and printed money in an effort to stimulate the economy.
This did bring down nominal interest rates on bank loans, but credit was still difficult to obtain as banks cut lending to rebuild balance sheets.
Such a re-balancing may have been expected to have led to recovery, Broadbent explained, but the ongoing crisis in the Eurozone has maintained the pressures in the market.
“We are now suffering from a more general rise in the premium demanded for all risky investments, however they’re financed,” he said, pointing to the rising cost of credit in securities markets.
Broadbent claims that the Bank of England’s very loose policy helped in 2008 and could help again in certain circumstances.
But, in terms of stopping an extreme Eurozone outcome “for the time being at least, the most important decisions affecting the UK are being taken in other parts of the continent”.