A long spell of ultra-low interest rates has not driven a rise in inequality in the UK, the deputy governor of the Bank of England has said, rebuffing criticism that central bank policy had hurt some households.
Ben Broadbent also reinforced the recent message from the Bank that it would tread carefully in setting interest rates over the coming months as it deals with a trade-off between keeping inflation in check and supporting the economy after the Brexit vote.
Broadbent’s comments on monetary policy and inequality follow Theresa May’s remarks earlier this year that there had been “some bad side-effects” from low interest rates and quantitative easing, which involves central banks pumping electronic money into the financial system.
Broadbent used his speech to outline why he thought the evidence showed low rates had not driven a rise in income inequality, given that most income came from wages and not assets. Furthermore, on the asset side too there was little effect on inequality from loose monetary policy, he said.
“In the UK, summary measures of income inequality – in particular the so-called Gini coefficient – have been broadly unchanged since real interest rates began to decline a quarter of a century ago,” Broadbent said in a speech to the Society of Business Economists’ annual conference.
He also noted the real price of shares, which tend to be held by richer households, was no higher than it was 20 years ago and nor was it any higher than before the financial crisis.
Turning to the housing market, he found house prices, which account for a much larger share of household wealth in aggregate, “did a lot better over this period” of two decades. But real house prices were no higher now than they were a decade ago. “And the result is that, whichever measure you use, the distribution of wealth has been broadly flat over that period,” he said.
Broadbent concluded the monetary policy committee (MPC), which sets interest rates and on which he sits, was not having a significant impact on inequality.
“I doubt that any independent decision of monetary authorities, the MPC included, has that much bearing on the behaviour of real asset prices over long periods of time, or any distributional consequences that follow,” he said.
“And the only reason for raising these issues, therefore, is the apparent concern that the opposite is true – that looser monetary policy, unconventional policy in particular, is having material and lasting effects on the distributions of income and wealth. I don’t think the evidence gives much support to that view.”
Broadbent also addressed the pound’s sharp fall since June’s vote to leave the EU. After official figures this week showed significant rises in manufacturers’ costs and the prices they charge their customers, Broadbent noted the likely impact on inflation from the weaker pound.
Referring to sterling’s fall, he said: “Over time, this is likely to put significant upward pressure on import prices and, because around 30% of consumption is imported, consumer prices as well.”
Broadbent noted, however, that reacting to a likely rise in inflation by raising interest rates could be “rather costly in terms of unemployment … This is not what the MPC is meant to do.”
But he stopped short of giving a steer on where that left the MPC, which hinted in its last set of economic forecasts that it would keep policy on hold for some time to come, with interest rates at a record low of 0.25%.
Broadbent said: “We can tolerate high inflation because the alternative is a larger rise in unemployment, and weaker wage growth. Put another way, we expect to have to accept those things (to some extent) in order to prevent inflation from rising further above the target. That’s the unavoidable nature of the trade-off that monetary policy occasionally faces.”
