The former Governor of the Bank of England Lord King has warned the central bank against further monetary stimulus to support the economy arguing it would be “premature” given the ongoing restrictions on activity.
Speaking to Econ Film’s CoronaNomics show, Lord King said it was too early for extra money printing, known as Quantitative Easing, to help the UK economy out of its biggest recession in modern history.
“At this stage I still think it’s premature to argue that a big monetary stimulus is appropriate because we still have significant aspects of a shutdown,” he said.
“Many sectors can’t open at all. It looks like there won’t be any live concerts, classical concerts, in London, until next spring. That’s a long, long way off,” he said.
“I think we have to wait until we get to a point where it looks as if the economy recovered to within a few percentage points of the level which it had reached at the very end of last year before really feeling that we can end the temporary support schemes and think in terms of conventional monetary and fiscal stimulus. I still think that is some way off,” said Lord King, who was Governor between 2003 and 2013.
Lord King has previously said that the Government’s furlough scheme should be maintained until it is no longer needed, rather than wound down by the end of October as the Treasury currently plans.
The Bank of England’s Monetary Policy Committee (MPC) will meet again this week, having voted to increase money printing by an extra £100bn at its last meeting in June.
That decision, which was supported by 8 of the 9 members of the MPC, will take the total stock of UK government bonds held by the Bank of England to £745bn by the end of the year.
That will take the central bank’s balance sheet up to around a third of the size of the total economy.
The minutes of the meeting showed that MPC members believed the additional QE would support company cash flows, general financial conditions but also “demand” in the economy, suggesting they do not share Lord King’s analysis that it is too soon for stimulus.
Though most analysts are not expecting further money printing from the central bank this week many anticipate further asset purchases later in the year.
Capital Economics expect a further £100bn of QE from the Bank of England by the end of this year and £250bn extra by the end of 2021, taking the stock of asset purchases to just below £1 trillion.
Financial markets are also pricing in a cut in interest rates in the UK into negative territory.
The Bank of England has said it is reviewing whether the policy, already implemented for several years by the European Central Bank, could be warranted in the UK and is expected to give an update on its thinking on Thursday in its Quarterly Monetary Policy report.
However, most analysts do not expect the Bank, ultimately, to pursue the policy of negative rates.
Away from the immediate crisis, Lord King said a lesson of the past decade since the financial crisis was that policymakers needed “different policy instruments” from very low interest rates and money printing to support growth.
“Monetary stimulus isn’t the answer to the stagnation that we’ve been experiencing,” he said.
“I rather regret the fact that this seems to be both within the economics profession and in many central banks a belief that a simple model…means that even lower interest rates is the answer. And I can’t see any theoretical justification for that proposition.”
Watch the full CoronaNomics interview with Lord King here