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3 November 2016updated 06 Sep 2021 10:46am

The Bank of England’s critics have got one thing right

Monetary policy can be improved. 

By josh Ryan-Collins

So Mark Carney, the governor of the Bank of England, is staying on to see out the Brexit negotiations, and is set to lay out his latest monetary policy plans today. 

Doubts had been raised over the governor’s appetite for the job, after criticism over his handling of the referendum and post-crisis monetary policy more generally. There were even the beginnings of a brief, and somewhat spurious, press campaign to replace Carney with one these staunch critics, Jacob Rees-Mogg. 

On Brexit, criticism has come from a raft of eurosceptic Tory MPs, who believe Carney and the Bank overstepped their remit with warnings about the damage it would do to the economy. But the Bank was no different here from nearly every other major financial forecaster. 

Brexit has not yet happened, so the true economic impact remains to be seen. But the vote on 23 June highlighted the urgency of our current economic troubles and the need for radical interventions to reduce divisions in the nation. People really do want to feel “in control” and the current economy does not allow them to do so.

The Bank of England’s monetary policy seems to have increased, not diminished, inequality. It is in this context that critics of the Bank have ammunition. 

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By purchasing safe financial assets like government bonds and more recently corporate bonds, via quantitative easing, and keeping interest rates ultra low, the Bank increases competition for other financial assets such as equities (shares). 

This pushes up their value and means anyone who holds such shares increases their wealth. And who is it that tends to hold shares? Not, on the whole, those struggling to make ends meet. Rather, it is those already in positions of power – big companies and wealthy individuals. 

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Indeed a recent study on six advanced economies including the UK by the Bank of International Settlements – the international banking regulator – found net wealth inequality has risen since the financial crisis. This was mainly due to increases in share value, which in turn driven by monetary policy in Europe. 

In the UK specifically, wealth inequality has significantly increased post-crisis, despite a headline economic recovery.  

According to the Bank of England and ONS data, those in the bottom 40 per cent of the income distribution have seen virtually no gains in their wealth since 2010. Those in the bottom 20 per cent have seen their wealth fall over this period. By contrast, those in the top quintile have seen their wealth increase by almost 20 per cent, again much of due to increases in equity prices. 

As the Bank of England’s Chief Economist Andy Haldane has put it, the so called recovery has “favoured the already asset rich”. 

At present, the impact monetary policy has on the distribution of wealth is not high on the central bank’s list of considerations. Instead, the focus remains on the policies that will be most effective in enabling the Bank to hit its inflation target. 

If the Conservative government is serious about addressing “burning injustices” and leaving no-one behind, and wishes to avoid further public criticism from Tory MPs, it should consider widening the Bank’s official mandate to take in to account distributional impacts.  

And there are a number of alternatives to QE that the Bank could then pursue to do this. 

So-called “helicopter drops”, where every household would receive a one-off pot of spending money, would certainly be likely to reduce inequality, as it would have a marginally greater impact on those at the bottom of the income and wealth spectrums. The economic benefits would also likely be greater if the additional funds were used to write-off existing debts weighing people down. 

Another alternative, strategic QE, would be for the central bank to buy bonds in the Green Investment Bank or housing associations to fund the building of infrastructure or new homes. Again, such a policy would be more likely to create jobs and help the wider economy. 

It remains to be seen whether Theresa May and her new Chancellor Philip Hammond will have the courage to push the Bank down such a path. What looks more likely is a volte-face on fiscal policy, with the Chancellor borrowing heavily to fund infrastructure and perhaps home building. Such a turnaround, eminently sensible with interest rates so low on government debt, would be remarkable enough after years of austerity and declining public sector capital investment. 

Doing so would reverse a policy that has weakened growth and hurt the poor hardest. It could start to heal the damage that Brexit exposed – and make Carney’s job overseeing the economy at least a little easier. 

Josh Ryan-Collins is a senior economist at the New Economics Foundation.