Current UK monetary policy is in transition. The present Governor of the Bank of England inherited a mess of a policy, and an institution which had presided over the biggest disaster in Central banking since the 1930s. The Bank of England allowed or even encouraged an unsustainable credit and property boom prior to 2007, with over expansion of commercial banks balance sheets. The competition authorities reinforced the Bank’s mistakes by allowing mega banking mergers to increase risks in the banking system. The Bank then switched in 2008-9 to too tough a stance, starving markets of liquidity and undermining the very banks they had allowed to grow and inflate.
Since 2008 the Bank has sought to drive the UK economy with one foot flat on the floor with the accelerator of money policy, and the other foot hard on the brake with banking regulation. At first the brake won and the economy made little progress. More recently there has been enough monetary effect to offset the brake, and the brake itself has relaxed a little as banks repair their balance sheets. Now it is time to ease the brake more, and to apply less accelerator, to return to more normal driving.
Let me explain the metaphor. Today the commercial banks have much more cash and capital than in the dark days of 2007-9. The Bank now appears to be changing the pace of its demands for more, and may allow sensible increases in loans again to finance economic recovery. The UK needs massive investment in energy, transport , tech and industrial capacity. More of that needs conventional bank finance.
At the same time savers deserve a return on their longer term savings and the artificial bubble in bonds needs gently deflating. Longer term interest rates are too low, and the stock of QE held bonds needs to be gradually brought down. Irregular monetary policy has produced gross distortions and inflation in certain asset prices. The bond bubble has occurred alongside property price rises making homes and commercial property too dear for many UK taxpayers to afford.
We should not wish to continue with the past pattern of asset price inflation, very low interest rates, and banking inability to finance investment for recovery. The UK needs a major expansion in investment capital, with new power stations, roads, rail capacity, water capacity, better digital technology for public service provision, better broadband and much else, as well as substantial capacity increases in manufacturing. Savers need to be offered a decent return on their savings to attract capital into more productive uses, and to expand the asset base to control asset price inflation.
Meanwhile the monetary madness remains the popular orthodoxy on the continent, with the European Central Bank likely to hit savers again and to carry on creating more money.