Outgoing Governor Mark Carney has mounted a robust defense of his methods at the Bank of England, while warning that "winter is coming" with low global interest rates set to persist for years.
Carney, who will step down from the BoE in March to be replaced by Andrew Bailey of the Financial Conduct Authority, was roundly criticized when he joined the central bank in 2013 for implementing a "forward guidance" policy under which the institution would not consider raising rates until unemployment declined to 7%.
He was accused by politicians of introducing other factors into rate-setting that undermined the simplicity of the message. Famously, one member of parliament called him "an unreliable boyfriend" — implying the public did not have a clear idea of the BoE's rate policy as a result of his methods.
However, in an implicit rebuke to critics in his speech to a BoE workshop on the future of inflation targeting, Carney called forward guidance a "clear and widely understood indicator," and a powerful policy tool that was effective in managing expectations.
Savers' returns, asset price increases
He also rebuffed critics who have attacked the BoE for keeping interest rates persistently low and thereby damaging savers' returns.
"The vast majority of savers who might lose some interest income from lower policy rates stand to gain from increases in asset prices that result from monetary policy stimulus, since only 2% of U.K. households have material deposit holdings without material financial assets or property wealth," said Carney.
Carney said that very low interest rates were effective at boosting spending. He said evidence suggested that a 50-basis-point cut in interest rates raises spending by 0.1% through cash flow effects alone.
Carney called "unconventional" methods like asset purchases and forward guidance powerful tools in a low interest rate environment. He said every extra £25 billion of asset purchases of gilts and corporate bonds was the equivalent of a 25 basis point cut in the bank rate.
"At present, there is sufficient headroom to at least double the August 2016 package of £60 billion asset purchases, a number that will increase with further gilt issuance," he said. "That would deliver the equivalent of around a 100 basis point cut to [the] bank rate on top of the near-75 basis points of conventional policy space."
Those who gained least from the higher asset prices resulting from the BoE's policy gained more from its effect in supporting jobs and activity during the financial crisis.
"Without this action, real wages would have been 8% lower, or around £2,000 per worker per year, and 1.5 million more people would have been out of work," he said.
BoE debating rate cut
He said there is presently a debate within the BoE's Monetary Policy Committee over the relative merits of a near term stimulus, or cut in the base rate, to help boost the sluggish U.K. economy now that uncertainty over Brexit had significantly waned.
"With the relatively limited space to cut [the] bank rate, if evidence builds that the weakness in activity could persist, risk management considerations would favor a relatively prompt response," he said. However, he also said there was evidence that global growth is showing signs of stabilizing and said the central bank would watch indicators of consumer and business confidence closely in the forthcoming weeks.
In the speech to the BoE workshop, Carney said structural changes in economies, technological advances and the changing nature of commerce would continue to push down inflation.
"It feels like winter is coming. In all likelihood, equilibrium interest rates will remain low for a prolonged period as many of the structural forces that have pushed them down are set to persist for years," he said.
Carney also said the BoE should resist calls for asset purchases to support policy goals not directly related to monetary policy — such as so-called green quantitative easing to support the transition to a net zero carbon world by supporting green finance. The bank, he said, was not omnipotent.
"While carefully circumscribed independence is highly effective in delivering price and financial stability, it cannot deliver lasting prosperity and it cannot address broader societal challenges," said Carney.
He said the current inflation-targeting framework did not provide policymakers with sufficient scope to respond to adverse shocks to demand and questioned whether it needed to be adjusted or even replaced.