Bank of England chief economist Andy Haldane has said he would be “very cautious” about cutting interest rates in the near future as the economy is stronger than it appears.
Speaking in Scunthorpe today he said low unemployment and relatively high consumer confidence meant a “super-charging” of the supply of goods and services in the economy was “what is now needed”.
Haldane, who has been the BoE’s top economist since 2014, said central banks had done their bit to get consumers spending following the 2008 financial crisis.
He said “fiscal and structural policies” were now required to help businesses and the economy grow.
On interest rates he also said uncertainty about the outcome of Brexit meant he thought it best to keep the Bank’s main interest rate where it is, at 0.75 per cent.
The BoE’s main rate is the interest it pays to banks that hold money with it, which broadly determines the level of interest rates across the economy.
Lower interest rates lead to more borrowing, which hopefully boosts economic growth, but can lead to prices rising too quickly.
Haldane said recent weak economic data was a result of Brexit uncertainty but the underlying economy was doing relatively well.
“Consumer confidence and spending remain robust, underpinned by a still-strong jobs market and rising real pay,” he said.
“When British consumers have more money in their pockets, it takes a lot to persuade them not to spend it,” he said. “They are three-quarters of all spending in the economy.”
The most likely shocks to the economy “are very different” to the crisis of 2008, he said. “Global trade wars and Brexit” would hit “the supply potential of the economy, as much as its demand side”.
As such, “pump-priming” to increase demand in the economy was no longer the most important thing policymakers should do. “The right medical prescription” was government policy to increase supply, he said.
Haldane also said financial institutions lowering their short-term interest rates was “not an accurate reflection of the most likely path” of rates because no one knows how Brexit is going to turn out.
If a no-deal Brexit caused a “sharp fall in sterling and a sharp rise in inflation expectations, it is not clear the [BoE] could cut interest rates, as the market expects, if it was to meet its inflation mandate,” Haldane said.
The BoE economist said there was a risk that people were growing used to ultra-low interest rates, which are a break from traditional monetary policy.
“It is important that monetary policy is not a prisoner of its past, that the monetary cavalry are not called at the first whiff of grapeshot, that a dependency culture around monetary policy is not allowed to develop.”