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Mr Fisher also reviewed the recent institutional changes at the Bank of England which, he said, “will help shape the policy environment for a generation”.
Paul Fisher noted that the advent of the Prudential Regulation Authority as a subsidiary of the Bank will “help us to exploit the synergies between micro-prudential supervision on the one hand and the markets, economics and financial stability expertise of the wider Bank on the other". The Financial Policy Committee (FPC) is now established with statutory powers. He noted that much of the work of the interim FPC was geared towards trying to ensure banks have enough capital: “If we are to have a set of banks fit to provide credit and offer payments services to the UK economy, they must be better capitalised and less leveraged than they have been in the past.”
Paul Fisher noted that “the economic data have been disappointing for some time. Trend growth should be more like 0.6 per cent a quarter and we have only had five quarters of growth at that rate or higher in the 21 quarters since the start of 2008. There had been no such weak period in the UK since quarterly GDP data were first published in 1955.” He went on to offer a possible explanation: “It is as if the different groups within our society have all decided that their future financial positions, on average, will be worse than they thought before the crisis”. He highlighted that households are saving more than they were pre‑crisis, and that one likely reaction to lower expected incomes is for people to try and work harder and to avoid unemployment if at all possible. That “explains in part why unemployment has stayed much lower than we would have expected, given the weakness of output growth. Much of the labour force has priced itself into work.” At the same time, he said, the Government is trying to reduce public expenditure, the financial sector is addressing balance sheet issues, and UK businesses continue to save rather than invest as much as they could. “Collectively the economy as a whole also needs to rebalance. The significant external trade deficit built up pre-crisis needs to close up further to be sustainable in the medium term.”
Paul Fisher said his own policy vote has been driven by the need to continue supporting the required real adjustments, but “cautiously, so as not to risk inflation expectations becoming de-anchored”. He noted that the Bank has been particularly active in seeking to support the real adjustments in the banking sector, with the extension to the Funding for Lending Scheme, and the FPC’s complementary capital recommendation. “Monetary accommodation should generally be helpful to balance sheet rebuilding, but there are limits.” By way of example, he says he is not convinced that a further reduction in interest rates would stimulate demand at this stage. “Working from such a low level of interest rates, we do not know for sure whether those effects remain the same, given pressure on the incomes of savers and high debt levels of borrowers: further cuts in rates may not feed through to higher consumption in the normal way and some of the effects could even be perverse.”
In conclusion, Paul Fisher emphasised that the public should expect the Bank to continue to play its part in supporting the recovery towards genuine real growth, whilst being careful not to let inflationary pressures build, consistent with its remit. “But monetary policy can only take us so far and the necessary real adjustments will need real changes and, most importantly, real time to work through.”