The Great Debate UK

Economic quagmire adds pressure for monetary policy change

–Darren Williams is Senior European Economist at AllianceBernstein. The opinions expressed are his own.–

Bank of England governor-elect, Mark Carney, has raised hopes that the central bank may soon switch to a nominal GDP target. Although the costs seem to outweigh the benefits, the attractions of a radical new approach will grow if the economy remains stuck in the doldrums.

In recent years, the Bank of England has been among the world’s most proactive central banks. It has reduced official interest rates to 0.5% and boosted the supply of central bank money by 18% of gross domestic product (GDP). This is considerably more than in either the US or the euro area over the same period.

This aggressive monetary expansion has been accompanied by a huge decline in the exchange rate. Since the first half of 2007, the pound has fallen by 20% in trade-weighted terms, far more than the drop in the US dollar (11%) or euro (5%) over the same period. Yet the UK economy has still performed poorly.