Kristin Forbes, a member of the Bank of England’s Monetary Policy Committee (MPC), has claimed that if low interest rates continue they could threaten to slow growth of productivity and make it more difficult for the bank to quickly respond in a future crisis, should it ever be required to do so.
While a number of benefits are created by the low rates, the long-term risks could outweigh any current benefits.
Ms Forbes highlighted that though the UK’s economic recovery is evident, the Bank of England’s interest rate remains at emergency settings and while risks are “moderate and manageable” for the time being this might not be the case in the future.
However, there is no firm proof to support the notion that threats to the wider financial system – such as excessive inflation or asset bubbles – will be created if the rate is kept low.
The MPC’s nine members recently voted to hold the bank’s rate – 0.5 per cent – as inflation fell to a record low of 0.3 per cent in the year to January.
While there is a chance that low interest rates could result in unwanted economic outcomes, they could also help to reduce inequality, and Ms Forbes admitted that: “It is unclear what the net effect on equality is of a prolonged period of extremely accommodative monetary policy.”
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