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Government must engage with the need for faster growth in the UK economy

3 min read

While the rest of the world’s central banks are fighting recession, the Bank of England is fostering a slowdown, writes Sir John Redwood MP

Late in 2018 and early in 2019 the economic world shuddered when a group of central banks overdid the tightening of credit and threatened us with another recession. The US Federal Reserve was the first to realise the error and to back off. Instead of putting through three more rate rises and shedding government bonds from its balance sheet as it was planning, the Fed last year made three rate cuts and supplied liquidity to the markets in generous quantities.

The People’s Bank of China also worried they had been tightening too much and put through a series of relaxations in required capital for their commercial banks to ease lending conditions, as well as edging to lower rates through adopting a more market-oriented approach to rate formation.

The European Central Bank later last year also saw the marked slowdown in the Euro area economy led by a sharp decline in German growth and decided to relaunch full quantitative easing, creating money to buy up government bonds.

The Bank of Japan continued with generous quantitative easing policies, keeping its 10-year borrowing rate down to zero.

As the year unfolded, many central banks joined in the move to stop a world slowdown becoming something worse, with rate cuts in Australia, New Zealand, Turkey, Russia, Brazil, Mexico and many others.

“The growth policy must be designed to avoid unhinging inflation expectations”

During this period the Bank of England carried on tightening. The UK economy, as a result of domestic policy and the world background, slowed a lot in the final months of 2019.

The new Government has set out new policy aims, wishing to promote growth and prosperity rather than regarding reducing debt as percentage of GDP as the prime guide and task of policy.

To do this they have fought an election on a platform of increasing spending, offering some tax cuts and allowing the budget deficit to rise to a modest 3% to allow for increased capital spending. This will presumably be the architecture of a new growth policy.

The Westminster Hall debate is designed to give MPs an opportunity to flesh out how they would like the new fiscal rules to work.

What balance do they want in increased spending and tax cuts? What are the priorities for capital investment? What other measures in areas like training and education, self-employment, business regulation, transport, trade policy and the rest could contribute to boosting growth? How can the growth be well spread around the whole country?

The Bank of England is independent when it comes to setting interest rates and to regulating individual commercial banks, so government does not intervene.

The Bank is also is part of the wider conversation about economic policy and has to work with the Treasury on issues like the size of its own balance sheet, bond buying and selling, and how to promote growth.

At a time of senior management change at the Bank, the debate also gives MPs a chance to comment on how the Bank’s independent policy relates to the wider Government pursuit of faster growth without waking the inflation dragon which it is charged to control. The growth policy must be designed to avoid unhinging inflation expectations.

Sir John Redwood is Conservative MP for Wokingham. His Westminster Hall Debate on ‘Growth strategy for the UK’ is scheduled for 9.30am on 21 January

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