Bank of England hits out at BIS report warning over low interest rates

 

Recent international warnings on low interest rates from the Bank of International Settlements (BIS) were criticised yesterday by UK policymakers, who suggested the central bank hub was operating in a bubble secluded from political reality. 

 

Bank of England governor Mark Carney said that the report had been written in “the vacuum of Basel”, by an organisation that had no responsibilities to a population. 

 

“My basic point is that this is an analysis that is outside the political and political economic reality,” Carney added. The governor actually sits as a director on the board of the BIS. 

 

Just prior to the Bank chief’s testimony to the Treasury select committee, official figures showed a surprise uptick in annual inflation in June – the consumer price index jumped by 1.9 per cent, up from 1.6 per cent in May, the biggest one-month rise since 2012. 

 

Although inflation has been below-target this year, the data indicated that price growth was just 0.1 percentage points short of the Bank’s aim last month. 

 

“Half of the rise reflected what seems likely to be a temporary blip in inflation in the clothing sector from minus 0.1 per cent to 2.4 per cent,” said Samuel Tombs of Capital Economics yesterday. 

 

He added: “This appears to have largely reflected the later start to the summer sales this year than last.” 

 

The latest report from BIS warned that low interest rates were promoting the accumulation of debt and could be entrenching a low-growth outlook. 

 

Andrew Bailey, chief executive of the prudential regulation authority and Bank of England deputy governor, also added some veiled criticism of the BIS position. 

 

“It’s an interesting commentary from an institution that doesn’t have policy obligations,” said Bailey, concluding that he agreed with the governor’s comments.

 

The FPC’s consultation paper advocates a more complicated framework for the leverage ratio than many expected… These complications risk undermining the simplicity that lies at the heart of the leverage ratio. 

 

The leverage ratio, to put it in the simplest terms, protects the institutions, but the system more importantly from risks that people think are low, but in fact are not… it works in a complimentary fashion to a risk-based approach. 

 

Markets are discounting the effects of quite a wide range of things going on in the world that could easily in other circumstances create shocks. Whether it’s Russia, whether it’s Iraq… These things just are not disturbing market volatility. 

 

When I made my comments at Mansion House… one was an adjustment to those comments, a bit of a pickup in volatility… but the medium term outlook for interest rates has not changed.