LOW INTEREST rates and money printing may fail to help the UK in the long run, as the loose policies act to postpone a very necessary readjustment of the economy, Bank of England governor Sir Mervyn King said last night.
He told a business audience in Cardiff that his record low interest rates might have prevented the recession becoming a depression, but they prevent bad investments from the boom years unwinding, and help failing firms survive on cheap credit.
“Almost four years ago now, I called this the ‘paradox of policy’ – policy measures that are desirable in the short term appear diametrically opposite to those needed in the long term,” he said.
“Although we cannot avoid the long-term adjustment to our economy, we can try to slow the pace in order to limit the immediate damage to output and employment. Loose monetary policy today will eventually give way to a tighter stance as the economy recovers.”
Sir Mervyn also rubbished the idea that the Bank could effectively cancel its holding of UK gilts, describing the move as “dangerous”.
The remarks may be in response to Financial Services Authority chief Adair Turner – a leading candidate to replace Sir Mervyn next year – who recently called for more “innovative and unconventional” forms of monetary stimulus.
And the governor hinted at better than expected third quarter GDP: “The zig-zag pattern of quarterly growth rates that we have seen this year is likely to continue, as we may see on Thursday [tomorrow].” he said.