According to a former Threadneedle Street policy maker, the Bank of England cut down the interest rates and should refrain from selling government bonds due to chaotic situations in the banking sector.
During the global financial crisis of 2008, a member of the Bank’s monetary policy committee, David Blanchflower, stated during this week’s meeting, official borrowing that the cost of borrowing should be cut down from 4% to 3%.
Although the financial market anticipates the Bank to either raise rates to 4.25% or keep them unchanged, Blanchflower advises the committee to rethink its approach after Silicon Valley Bank in the US collapsed and Credit Suisse was bailed out by the Swiss government.
Along with fellow economist Richard Murphy, Blanchflower advised the Banks to reverse quantitative tightening (QT), under which the bonds were gradually sold between the 2008 financial crisis and the COVID-19 pandemic to boost the money supply and support the economy.
The pair strongly advocated the Bank’s easing quantitative program to offset the impact of austerity since 2010. In a submission to the Commons Treasury select committee to prevent the economy from further sliding into recession, they should resume buying bonds at £50 billion a year, Blanchflower and Murphy rejected the idea that quantitative easing (QE) caused the inflation to hit its highest level in four decades. Last September, the Bank announced plans to sell £80 billion of the £895 billion in bonds it had amassed over the previous year.
Blanchflower and Murphy stated that there was an “urgent need” to cut down the interest rate by one percentage point with more to follow, based on the Bank’s prediction for a two-year increase in output and inflation dropping below its target by 2025.
During the last meeting in early February, Silvana Tenreyro and Swati Dhingra, two members of the committee, opted to keep rates on hold at 3.5% but were outvoted by the other seven members. Although the European Central Bank went ahead with a planned 0.5-point increase in interest rates last week despite the chaotic financial turmoil at SVB and Credit Suisse, the financial market thinks that the chances of the committee putting borrowing costs on hold on Thursday are increasing.
Blanchflower stated, “The Bank of England is showing signs of dangerous groupthink when it comes to QT, believing that it must reverse the previous policy of QE when they have not as yet offered any credible reason for doing so.”
He further added: “The Bank of England needs to stand back and reappraise its role in the economy. It could use QE over the next few years to be a powerful force for good for the people of the UK, transforming the mortgage, student loan, and business investment markets in the process using new funds created via QE. We urge them to grab this opportunity instead of heading us towards almost inevitable recession or even depression, so severe could the impact of QT be.”
Murphy stated that QE had been “benign and saved the country from many of the worst impacts of the austerity pursued by successive governments since 2010 without creating the current inflation we are suffering.”
“The Bank of England is also unable to justify its QT policy, but what is clear is that this policy, if combined with more austerity in fiscal policy and a high-interest rate, might have disastrous consequences for the UK economy over the next few years, including household debt and consequent banking crises, as well as by creating a major threat to the viability of many businesses. The Bank should cancel this policy now.”
- Published By Team Timeswire