BOE's Broadbent Says Don't Blame Me for Real-Rate Drop

Bank of England Deputy Governor Ben Broadbent said economic changes, not central bankers, are the key driver of a long-term decline in interest rates that has benefited the wealthy.

“I read a lot of economic commentary that says interest rates are low because central banks have chosen to keep policy rates low and this has pushed up the price of risky assets, benefiting only those who happened already to own them,” Broadbent said in a speech in London today. “I’m not sure either of these is true.”

The BOE, along with the Federal Reserve and the European Central Bank, has cut its benchmark interest rate to a record low to help the economic recovery. While acknowledging that monetary policy affects asset prices, Broadbent said arbitrary rate changes would only have a temporary impact on prices and inflation would rise.

“And, in the real world, that’s not what’s happened –- inflation has remained broadly close to target even as real interest rates, long as well as short, have trended downwards,” he said. “This bears out, for me, that the real task for policy is to understand -– and then adapt to –- economic forces affecting the natural, or equilibrium, rate of interest.”

Rate Path

Speaking at the Society of Business Economists annual conference, Broadbent said “neutral real rates are likely to stay low for some time yet –- with the implication that any rises in official policy rates are likely to be ‘limited and gradual.’”

Minutes of the Monetary Policy Committee’s October meeting published yesterday showed officials voted 7-2 to keep the benchmark at 0.5 percent, citing pessimism about the global outlook and a loss of momentum in the euro area, Britain’s biggest trading partner.

“Eventually, as the headwinds previously highlighted by the MPC dissipate,” the key rate is “likely to rise,” he said.

On the factors that could cause a “sustained rise in real interest rates,” he said possibilities include a lasting solution to the euro-area crisis or a revival in optimism about global productivity growth.

“It is unlikely to be the arbitrary whim of central bankers,” he said.

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