An external member of the Bank of England’s Monetary Policy Committee said the central bank is constantly on alert for negative side-effects of near-zero interest rates.
Michael Saunders, who joined the MPC in August from Citigroup, told the Financial Times: “If we thought the adverse side effects of monetary policy easing outweighed the potential boost, then our willingness to use the tool of easing, even in a time the economy was sluggish, would be much less.”
“I do not think we are at that tipping point, but that is something we have to be constantly on the alert for,” he said.
The Bank of England held interest rates steady at their record low of 0.25% last week, after the first meeting of the bank’s MPC since its historic rate cut from 0.5% in August.
Saunders also responded to concerns that low rates risk worsening a public pension deficit. Loose central bank monetary policy has cut yields on safe assets, such as government bonds, to zero and below, making it harder to provide a steady income for pensioners.
Saunders said the policy has boosted the values of assets held by pension funds, balancing out their increased liabilities.
“That is probably better, even purely for pension fund deficits, than a policy of doing nothing, which would have left you with worse growth prospects, weaker asset prices and you might still have had some downward effect on bond yields as a symptom of a depressed economy,” he said.
He also said that Britain’s vote to leave the European Union will have a muted effect on the UK economy, with the situation eased by the Bank of England’s low rates and asset purchases.
“In the near term, the next year or two, I think that the economy will slow but perhaps not slow as much as the consensus has been expecting,” Saunders said.
“This is partly because of the support from loose financial conditions” and “partly because of the underlying advantages” of the economy.