13th December 2013
The Bank of England’s chief economist Spencer Dale has cautioned that “breakdown of trust” between UK businesses and banks remains an obstacle to the nation’s economic recovery writes Philip Scott.
Speaking at Confederation of British Industry (CBI) event, the monetary policy committee member asserted that overall, “there are good reasons for optimism that the recovery will persist…but we can’t take it for granted.” He added that the “events of the past few years may colour and contaminate business behaviour for many years”.
In particular, he suggested that “the reluctance today of some companies to borrow from their banks may be less a lack of demand and more a breakdown of trust”, which adversely effects “the efficient functioning of our economy.
However Dale attributed the recovery partly to improved availability of credit and that he has seen a “marked improvement in the ability of many companies and households to access credit over the past 18 months” aided by the Funding for Lending scheme and the Government’s Help-to-Buy policies.
But in terms of credit supply to small businesses, he said while steps have been taken in the right direction, “there is further to go”.
Dale suggested that reduced economic uncertainty has probably played an even more important role in turning the economy around this year than the availability of credit, adding that uncertainty and fear greatly amplified the impact of the financial crisis.
In his speech he noted that as companies faced with a more uncertain outlook adopted a defensive strategy, hunkering down to ensure they survived the economic storm, they held off “undertaking new investments or starting new ventures”. But the “cloud of uncertainty has started to lift” which should “provide a powerful spur to the recovery”.
On the UK property sector he argued that “a healthy housing market is good for our economy and will help to support the recovery” but warned it has a “microwave type quality to it, with a tendency to turn from lukewarm to scalding hot in a matter of a few economic seconds”. However he believes the Bank is far better equipped today to respond to these types of risks than it has in the past.
On monetary policy, Spencer emphasised the MPC’s forward guidance is “rooted in the recognition that it’s a long way back to the economy being fully recovered. The message to businesses is clear, Spencer contends: “You can plan for the future in the knowledge that the MPC intends to keep interest rates low until we’ve seen a prolonged period of strong growth, unemployment is significantly lower, real incomes are higher.”
Generally though he said a complete economic rebound remained some way off, noting that “the journey back to full recovery is long and many challenges still remain. Monetary policy is there for the long haul. That is the essence of forward guidance” and the damage and losses associated with the financial crisis…won’t be reversed by one or two quarters of strong growth”.
Spencer’s best guess is that such conditions for raising rates remain “some way in the distance”. But once they are met, and rates start to rise he said this should be viewed as a sign of the strength of the economy and that “the emergency life-support measures put in place since the crisis are no longer required.”
He added: “The MPC is fully aware that extraordinary low interest rates are likely to be needed for some time yet. But when they cease to be, this will be a sign that we have finally turned the corner for home.”