UK fiscal stimulus will be ‘difficult’ for BOE, Haskel says

THE UK government’s plan to stimulate the economy raises “difficult” issues for the Bank of England (BOE) as it tries to cut inflation from near its highest in 40 years, a member of the central bank’s policy-making panel said.

Jonathan Haskel, who sits on the BOE’s 9-member Monetary Policy Committee, indicated the economy has little capacity to absorb a big fiscal expansion from the Treasury because of tightness in supply chains and labour market.

“We’re in an uncomfortable position,” Haskel said at a panel discussion in London on Thursday (Sep 22). “The difficulty with the fiscal expansion is we’re doing it in the context of a very tight labour market and difficulties in China, which mean that our supply chains are rather compromised.”

The comments underscore the trade-offs facing the BOE as it raises interest rates to keep inflation from spreading across the economy. Raising borrowing costs also threatens to tip the UK into recession, while Prime Minister Liz Truss’s government is planning to announce a package of measures to stimulate growth.

The BOE on Thursday hiked rates by half a point to take the benchmark to 2.25 per cent. Haskel was one of 3 BOE officials to vote for a 75-basis-point hike, arguing the incoming fiscal stimulus would boost demand and feed inflation.

Haskel noted that the government’s argument is that its programme will boost the productive capacity of the economy by putting people back to work and encouraging businesses to invest. If that unfolded the way Truss hopes, “that would get us out of the sort of push and pull that situation”, Haskel said.

SEE ALSO

Bank of England raises rates to 2.25% despite likely recession

BOE says Truss plans could slow inflation, too soon to talk about rates

He also noted that the government derived a huge benefit from cutting defence spending over the past few decades, allowing it to boost spending on health. And the UK slashed carbon emissions by boosting renewables but requires natural gas to generate power when the wind isn’t blowing. In both those cases, Haskel said there’s pressure to reverse the measures that have benefitted the UK in the past.

“There’s a whole load of very big trade offs here, and there’s no free lunches,” Haskel said.

He also said:

• He wasn’t too concerned about a drop in the value of the pound: “Currencies go up, currencies go down,” he said. “I worry a lot more about gas prices” and about what factors lie behind the decline in the value of the pound, like the “institutional confidence that outside investors” have in the UK economy.
• “I think we need to keep our institutions sound and buy the credibility that way.”
• “The bulk of the evidence is pretty negative against trickle down economics,” Haskel said. “To try to be as fair as I possibly can, I believe there are a number of other policy announcements in train” that have more of a chance at boosting growth. BLOOMBERG