One of the Bank of England’s independent monetary policymakers indicated on Tuesday he was minded to vote soon for more stimulus in response to a deteriorating economic situation.
Giving an online update on his assessment of the UK’s economic situation, Gertjan Vlieghe, an independent member of the BoE’s Monetary Policy Committee, said the outlook for policy “was skewed towards adding further stimulus”.
Initially, this would be in the form of more quantitative easing, he said, although this was losing its potency to raise spending by companies and households.
He was open to the idea of using negative interest rates as a stimulus, but added that the MPC was not yet ready to implement the policy.
Mr Vlieghe is an influential MPC member because he is one of the few willing to be open and transparent about the likely path for monetary policy and the options available to the MPC.
In his speech, he said the economy was still weaker than the lowest point of a normal recession, despite the rapid growth experienced since the coronavirus lockdown began to be lifted in May.
With output still 9 per cent below the pre-pandemic level and the spread of the virus intensifying, he said the outlook was difficult for the UK economy as it headed into winter.
“There is a tremendous challenge ahead. Gross domestic product and labour market indicators stand at levels that are below what has historically been the trough of a recession. Given that virus prevalence has been increasing again recently, it is likely to weigh more heavily on economic activity,” Mr Vlieghe said.
With the virus spreading and risks “starting to materialise”, he added that “in my view, the outlook for monetary policy is skewed towards adding further stimulus”.
The MPC is scheduled to announce its latest decision on November 5, with expectations increasing that it might extend its quantitative easing programme above £745bn. However, Mr Vlieghe said that the policy was not likely to be as effective as in the past when financial markets were jittery.
He said the key way QE worked was by reducing financial markets, households and companies’ expected future interest rates, making them more willing to borrow and spend rather than save. With these expectations “already very low”, he said that “QE is probably less potent now than in March at the height of market disruption and uncertainty”.
He said the BoE, therefore, would find itself with few effective policy tools available and therefore should urgently continue to examine the case for negative interest rates. “Given how low short-term and long-term interest rates already are, headroom for monetary policy is limited, and we must consider ways to extend that headroom,” he added.
For the BoE to set negative rates, the policy must be “feasible, effective and appropriate”, according to Mr Vlieghe.
“My own view is that the risk that negative rates end up being counterproductive to the aims of monetary policy is low,” he said.
But he added that the committee was not yet at a point where it could decide to impose negative interest rates.