Low interest rate challenges could be tackled by more than just central banks, says MPC committee member

Hayley Kirton
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Sir Jon Cunliffe on his way to a Select Committee hearing
Cunliffe noted ever-changing exchange rates made rate setting more difficult (Source: Getty)

The solutions to problems often pinned on lower for longer interest rates may lie somewhere other than central banks, a key member of Monetary Policy Committee (MPC) said today.

Speaking at the University of Manchester, Bank of England deputy governor for financial stability, Sir Jon Cunliffe, explained that issues could be addressed through, for example, putting policies in place to prop up productivity.

"The answers to these challenges are not simple," Cunliffe said. "Structural change to raise productivity can be very difficult; it often means there will be losers and winners. Likewise, fiscal policy needs to balance public spending with sustainability through time.

"These are certainly not, I readily admit, issues for central bankers. It is not so much that we have our plates quite full meeting our much narrower and shorter-term mandates – though that is surely true. It is that, more fundamentally, these are decisions and actions that only governments can and should take."

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Cunliffe also noted that sharp shifts in exchange rates, such as the recent drop in the value of sterling, made setting rates trickier.

"There are limits to the extent to which above-target inflation can be tolerated," he said. "These limits depend inter alia on what is driving the inflation overshoot, on the impact on inflation expectations and on the scale of the output gap. The exchange rate shock has made it more difficult for policy to follow the natural rate."

Back in August, the Bank of England opted to cut the base rate to 0.25 per cent, the lowest it has ever been in the bank's 322-year history, in a bid to fire up the economy following June's Brexit vote.

Elements of Cunliffe's speech echoed earlier words of European Central Bank president Mario Draghi, who, back in May, called rock bottom interest rates a symptom, rather than the cause, of wider economic problems.

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