DON´T BLAME CENTRAL BANKS FOR WEALTH GAP / THE WALL STREET JOURNAL

October 23, 2014, 4:14 AM ET

Don’t Blame Central Banks for Wealth Gap

ByJason Douglas

 

LONDON—A senior Bank of England official Thursday pushed back against critics who claim central bank policies only benefit the wealthy.

Those critics say ultralow interest rates and central-bank asset purchases have fueled a surge in asset prices without spurring durable economic growth, benefiting the rich yet doing little for the wider economy.

 

Ben Broadbent, the U.K. central bank’s deputy governor for monetary policy, said in a speech to the Society of Business Economists in London that the actions of central banks aren’t sufficient to explain the low level of interest rates across much of the developed world and nor are they sufficient to explain the behavior of prices for assets including stocks and bonds.

His remarks add to a lively debate over the wisdom of central banks’ crisis-fighting measures and also highlight a renewed focus in policy circles over widening disparities in wealth and income.

“I read a lot of economic commentary that says interest rates are low because central banks have chosen to keep policy rates low and that this has pushed up the price of risky assets, benefiting only those who happen to already own them. I’m not sure either of these is true,” Mr. Broadbent said, according to a text of his remarks.

Mr. Broadbent said central bank policy rates are low because the rate of interest required to keep output stable and inflation subdued in most economies has declined. This so-called natural rate of interest has been falling for 20 years, he said, driven by excess savings seeking a home and a rise in investor appetite for safer returns, often those from government bonds. Ageing populations have reinforced these trends, he said.

Mr. Broadbent said this “remorseless” decline in the natural rate of interest in countries such as the U.K. has meant that central bank policy rates have had to fall sharply to keep output on track and price growth stable.

 In the U.K., the BOE’s benchmark rate has been pegged at 0.5%–a record low in the central bank’s 320-year history–for more than five years to lift growth and keep annual inflation close to the BOE’s 2% target.

 Keeping policy rates at historic levels would have hurt growth and pushed up unemployment, he said.

“An official interest rate that might once have been considered inflationary is now contractionary,” Mr. Broadbent said.

Mr. Broadbent said low rates and asset purchases may have benefited holders of assets such as bonds but that is to be expected if assets are unevenly distributed. He added asset prices are ultimately determined by factors other than monetary policy.

“Over time, trends in real asset prices are determined by real non-monetary forces: we may occasionally be prominent actors but it’s someone else who’s written the script.”

He noted that central bank policies haven’t had a similar effect on incomes as on wealth. In the U.K. at least, the share of national income going to labor, as opposed to wealth, has remained broadly stable for decades.

Mr. Broadbent didn’t discuss the outlook for U.K. monetary policy in detail in his remarks, beyond saying the decline in the natural rate of interest reinforces his belief that when interest rates in the U.K. do rise, any increase will be “gradual and limited.” Investors expect the BOE to begin tightening policy in the third quarter of next year.

Mr. Broadbent added it is unclear whether a turnaround in the global economy or a sustained pickup in productivity growth will be sufficient to start pushing the natural rate of interest higher again. But he said whatever does cause such a rise, “it is unlikely to be the arbitrary whim of central bankers.”