Andy Haldane used a speech entitled “How low can you go?” to flag signs of a slowdown in the UK and discuss events in China, where an economic downturn has coincided with a stock market rout and sent jitters through global markets. His comments appear to be at variance with the Bank’s governor, Mark Carney, who has indicated that rates might rise from 0.5% early next year.
Haldane, one of nine policymakers who vote on interest rates at the Bank, reiterated warnings he made earlier this year that the UK economy was not ready for higher borrowing costs.
“In my view, the balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside,” he said.
“Against that backdrop, the case for raising UK interest rates in the current environment is, for me, some way from being made.”
Haldane’s comments put him at odds with Carney and other members of the monetary policy committee, who have been talking up the strength of the UK economy and its ability to withstand shockwaves from slowing emerging markets.
Haldane said it was unclear how much the UK would be affected by the slowdown in emerging nations, which have helped drive global growth in recent years. But he said there were significant risks of contagion given the growing clout of developing economies in recent years.
He argued that the latest developments in China and Greece should be seen as part of a pattern. “In my view, these should not been seen as independent events, as lightning bolts from the blue. Rather, they are part of a connected sequence of financial disturbances that have hit the global economic and financial system over the past decade,” he said.
“Recent events form the latest leg of what might be called a three-part crisis trilogy. Part one of that trilogy was the ‘Anglo-Saxon’ crisis of 2008-09. Part two was the ‘euro-area’ crisis of 2011-12. And we may now be entering the early stages of part three of the trilogy, the ‘emerging market’ crisis of 2015 onwards.”
Added to that, Haldane highlighted challenges in Britain. “While the UK’s recovery remains on track, there are straws in the wind to suggest slowing growth into the second half of the year,” he said. “Employment is softening, with a fall in employment in the second quarter and surveys suggesting slowing growth rates.
“Surveys of output growth, in manufacturing, construction and possibly services, have also recently weakened. All of these data were taken prior to recent emerging market economy wobbles.”
Given those risks, there was no case right now for hiking, and perhaps just as much chance of the next move being a cut, he said. “One reason not to do so is that, 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,” Haldane said.
He also used his speech to discuss how central banks may have to get used to interest rates being permanently low. Discussing ways of dealing with that change, he appeared to dismiss the idea of making quantitative easing permanent, something that has been floated by the new Labour party leader, Jeremy Corbyn, as “people’s QE”.
One option Haldane said central banks should explore was charging a negative rate on currency via a state-issued digital currency.
“If global real interest rates are 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. That may require a rethink, a fairly fundamental one, of a number of current central bank practices,” he said.
“Perhaps central bank money is ripe for its own great technological leap forward, prompted by the pressing demands of the zero lower bound,” Haldane added.