A prolonged low-interest-rate environment may make economic downturns more severe and weaken the resilience of the financial sector, Jon Cunliffe, deputy governor for financial stability at the Bank of England, said Oct. 14.
"Low for long makes demand management of the economy more difficult in downturns, reducing the space for monetary policy easing with conventional tools," Cunliffe said at a speech in London. Such an environment could also lead to greater risk-taking and less resilience in the financial sector due to "a slow or an unwilling adjustment" to the lower returns implied by a prolonged period of low rates, he added.
The greater risk of severe economic downturns in a low-for-long interest rate environment may mean that banks' countercyclical capital buffers should be "made more powerful," Cunliffe said. Banks must maintain their countercyclical capital during times of excessive credit growth and may reduce the buffer during a downturn to reduce pressure on cutting back on lending and to avoid a credit crunch.
Cunliffe made the remarks after Dave Ramsden, BoE deputy governor for markets and banking, told The Telegraph in an interview that the "entrenched uncertainty" stemming from Brexit that is weighing on U.K. economic growth may hinder the central bank from further easing monetary policy.