This week in a fascinating speech entitled “Umbrellas don’t cause rain”
, Monetary Policy Committee (MPC) member Gertjan Vlieghe set out the MPC’s case for its current approach to monetary policy and, in particular, the setting of very low interest rates.
He puts forward much evidence to support his view that, in aggregate, the economy is better off following the monetary stimulus provided by lower interest rates and asset purchases than would otherwise be the case. Clearly the UK and, indeed, the world economy is still, even after eight years or so, struggling to shake off the effects of the financial crisis and monetary stimulus has been a necessary response to that. Borrowers have clearly benefited. But it would be wrong to suggest there have not been losers as well as winners from this policy. Cash savers have certainly felt the squeeze.
Challenging the view that low interest rates are bad news for savers, Mr Vlieghe asserts that on the contrary savers, like everyone else, are benefiting from the more benign economic environment engendered by expansionary monetary policy. That may well be the case in aggregate, and compared to the counterfactual of a higher Bank Rate. But at the individual level it doesn’t feel that way for a lot of people and, whilst the macroeconomists and other technocrats on the MPC may not – or do not have to - appreciate that, others do.
Building societies get it
. They witness on a day to day basis the plight of savers reliant on declining returns on their cash. Societies are doing the best they can to shield their saving members from declining market interest rates. Mostly, politicians now seem to get it too, although it has taken a long time for them to do so; we have seen a number of recent government initiatives to improve the lot of cash savers, with various changes to the ISA regime and the introduction this year of the personal savings allowance, among others.
Evidence from independent research the BSA recently commissioned from IPSOS Mori
showed that whilst cash savings levels have remained robust, the predominant motive is precautionary: people are worried about continued economic uncertainty, which may even include further interest rate cuts. We hope that the MPC will factor such evidence into its future deliberations and recognise the impact of its actions on disadvantaged individuals as well as on the macro-economy.