Britain Needs Fiscal Boost as Monetary Policy Reaches Limits, Say Former BoE Officials

By Ana Nicolaci da Costa and Jamie McGeever

LONDON – Following the recent vote to leave the European Union, Britain should consider expanding its fiscal policy to invigorate the economy, as the effectiveness of the Bank of England’s monetary policy has largely reached its limits, according to two former policymakers from the BoE.

The referendum on June 23 has raised concerns that the economy might face a recession, prompting BoE governor Mark Carney to indicate that additional stimulus measures could be necessary in the near future.

During a policy forum hosted by Fathom Consulting, former BoE deputy governor Charles Bean emphasized the need for greater collaboration between the government and the Bank of England. He noted that the Treasury is in a better position to respond to potential economic downturns than the central bank.

Bean remarked, "I wouldn’t rule it out," highlighting that there isn’t the same level of apprehension at the Bank about engaging with fiscal authorities compared to some EU counterparts.

The UK’s new finance minister, Philip Hammond, has expressed a commitment to supporting the economy alongside the BoE. He mentioned the possibility of a "reset" of fiscal policy, which suggests a shift towards a less stringent approach than that of his predecessor, George Osborne, who advocated for strict budgets and spending cuts.

Former Monetary Policy Committee member Charles Goodhart acknowledged the dire state of Britain’s long-term fiscal outlook but agreed on the necessity for government intervention. He stated, "In the short run, there’s a very, very strong argument for more expansion," while cautioning about the long-term implications of an aging population and rising healthcare costs.

With interest rates in many developed countries hovering near zero—some even negative in regions like Japan and the eurozone—there is growing consensus among economists that central banks have limited options left. This has sparked discussions around “helicopter money,” which refers to the concept of directly injecting money into the economy to stimulate growth and inflation.

Bean clarified that helicopter money is essentially a form of joint fiscal easing financed by government bonds, with the central bank purchasing these bonds without intending to redeem them. "People who think there’s some untried monetary instrument called helicopter money are kidding themselves," he noted, categorizing it as merely a fiscal action paired with traditional quantitative easing.

He also mentioned that the Bank could consider diversifying its asset purchases beyond government bonds to include corporate debt or even equities. However, such actions could tread into politically sensitive territory, necessitating collaboration with the Treasury.

Since the referendum, business surveys have indicated a slowdown across various sectors, including services, manufacturing, and construction, while consumer confidence has seen a decline.

Most economists expect the Bank of England to announce a 25 basis point cut to interest rates in an upcoming meeting, although opinions are divided on whether the bank will resume its bond-buying program.

Both Bean and Goodhart expressed concern that the Bank of England’s strong signals regarding potential actions could jeopardize its credibility if expectations are not met. "The Bank has rather boxed itself in by the statements that have been made," Goodhart commented.

He further observed that, given the prevailing assumption that the Bank would cut rates, it might feel compelled to follow through, as failing to do so could negatively impact its perceived credibility.

The Bank surprised financial markets in July by keeping interest rates unchanged despite expectations for a reduction, but given the new data from business surveys, Bean posited that "some sort of action seems to be entirely warranted."