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18 September 2015

Bank of England: How low can you go? – speech by Andy Haldane

The BoE's Chief Economist Haldane discussed the future of the monetary policy, considering the need for central bankers to explore ways of achieving the zero lower bound.

In a speech to the Portadown Chamber of Commerce in Northern Ireland Andy Haldane, the Bank of England’s Chief Economist, discusses the future of money and the future of monetary policy.
Andy Haldane first considers the need for central bankers to explore ways of conducting monetary policy at the zero lower bound. He then turns to the outlook for the UK economy today, setting out his stance that “the case for raising UK interest rates in the current environment is… some way from being made.”
“Following the global financial crisis, short-term interest rates fell sharply in a great many countries”. Monetary policy makers must now consider how to deal with the risk that global rates remain persistently lower. “Central banks may then need to think imaginatively about how to deal on a more durable basis with the technological constraint imposed by the zero lower bound on interest rates.”
Mr. Haldane explores three possible solutions. The first “would simply be to revise upwards inflation targets” giving central banks extra interest rate “wiggle room”. However, any such increase could have a negative effect on inflation expectations which could in turn “be damaging to macro-economic stability.” It would also be inconsistent with the public’s preferences.
Alternatively, unconventional monetary policy tools could be made permanent. “That might mean accommodating QE as part of the monetary policy armoury during normal as well as crisis times”. Although QE does appear to have been “reasonably powerful”, it is highly state contingent and its impacts are uncertain; a permanent version could blur the line between fiscal and monetary policy and potentially undermine central bank independence; and, international spill-over effects could have consequences for the exercise of national monetary policy in other countries.
The third and final option for dealing with the ZLB would be charging a negative interest rate on currency, most probably through a state-issued digital currency. “This would preserve the social convention of a state-issued unit of account and medium of exchange… But it would allow negative interest rates to be levied on currency easily and speedily”. Many questions remain about how this would work in practice and whether the public would support the change, but it is an area worthy of further research as it would represent a “great technological leap forward” for money and monetary policy.
He concludes “were the downside risks I have discussed to materialise, there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target.” 

© Bank of England

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