Bank of England Monetary Policy Committee member Ben Broadbent defended the openness of the U.K. economy and said international developments are just as important for the outlook as domestic ones.
“Thanks to the deep integration of international banks and capital markets, problems that arise in one part of the world can rapidly arrive on our own shores,” Broadbent said in a speech in London today. “It would be a big mistake, however, to imagine that the system brings us only problems.”
While the U.K. economy expanded at the fastest pace since 2007 last year, fueled by domestic demand, the Bank of England has warned that growth can only be sustained if the improvement broadens. Crediting domestic policies entirely is misleading because the international environment is important, and “it matters more than via trade volumes alone,” Broadbent said.
Broadbent also said that European Central Bank President Mario Draghi’s efforts to tackle the euro-area debt crisis in 2012 show the positive impact of strong global ties.
“U.K. policy alone cannot explain why, coincident with the fall in funding costs for U.K. banks, you also saw a steep decline in those for banks in continental Europe,” he said in a speech at the Institute of Economic Affairs conference. “That, surely, had more to do with the ECB’s declaration that it would ‘do whatever it takes’ to hold the euro together, and the backing that statement received from core-country governments.”
The U.S. outlook and data also play a key role in determining U.K. yields, Broadbent said, with U.S. employment data affecting two-year gilt rates as much as any indicator from the U.K.
The Federal Reserve has pared its monthly bond-buying by $20 billion to $65 billion and signaled it will continue to pull back as the world’s largest economy expands. While global policy makers are at odds over how much to blame tapering for the sell-off in emerging markets, Broadbent said the impact may be overstated.
“It’s easy to exaggerate this channel,” he said. “It’s not as if the U.S. is the only source of risk in the world. In the past three-to-four years, the problems in continental Europe have surely been more important, both globally and for U.K. markets specifically.”
Broadbent also said that U.K. productivity growth has been “unusually weak” since the financial crisis and there is “no guarantee” that it will begin to converge toward U.S. levels.
“Productivity has stagnated and the earlier process of productivity convergence has gone into reverse,” he said. “There’s no inevitability that we recover that lost ground: even when international capital is mobile, productivity can diverge as well as converge to the frontier. On balance, however, we are surely likely to benefit from our exposure to the world.”