On 14^th July at Leigh Court, GWE Business West [1] brought together representatives from the local business community to hear from Professor David Miles, an external member of the Bank of England’s Monetary Policy Committee.  David discussed the current macroeconomic outlook, his interest rate decisions during his time on the Committee, and some aspects of the future stability of the banking system.

Business leaders and representatives from the Federation of Small Businesses, Lloyds TSB, HSBC, SWAIN, The Bristol Port Company, Barclays and Bristol City Council were amongst the attendees. David Miles said he “Welcomed the chance to come and talk about the economy to local business people.”  David added that he was also in the region to listen and considered these events an important opportunity for a two-way exchange of information.

David began by explaining the extraordinary steps taken by the MPC in reaction to the economic downturn, cutting interest rates rapidly in late 2008 and early 2009 to just 0.25% and subsequently injecting around £200 billion additional money into the economy, through the process known as quantitative easing.  He noted however that the current rate of inflation, at 3%, was still above the Bank of England target rate of 2%, which had been impacted by a number of transitory factors, including the dramatic fall in Sterling, the VAT rate change and also sharp rises in oil prices.   He pointed to recent forecasts in the Bank’s Inflation Report that suggested these factors were expected to dissipate and inflation would fall back towards the Bank’s target later in the year.  David noted: “I look forward to the day when it will be appropriate to tighten monetary policy since a return to more normal levels of interest would be a welcome sign that economic conditions were also normal.  But I do not think that is where we are today.”

David countered those who argue monetary policy should be set in a different way, so as to reduce the chances of the banking crisis in the future, rather than aimed at ensuring price stability:  “capital requirements are a better means to an end.”  “On the eve of the financial crisis”, he noted, “… the capital of UK banks, relative to their assets, was around half the level that was typical fifty years earlier”.  And banks’ liquid assets were “…a fraction of what would have been normal twenty years earlier and a tiny fraction of what would have been normal before the 1970’s”.

He went on to argue that the fragility of the banking system can be reduced without incurring a high cost in terms of lower economic activity.  David said: “I am rather sceptical about the claims that substantially higher capital requirements must mean significantly higher costs of funds for those who borrow to invest and that total investment and output in the economy will be significantly lower.”  He suggested that, under a plausible range of assumptions, the economic costs of higher bank capital requirements may be small, but the impact on the robustness of the financial system large. 

Questions and comments from the attending businesses leaders ranged from the issue of quantitative easing, to the availability of mortgages, concerns about unemployment to the tools at the disposal of the Monetary Policy Committee in maintaining the target rate of inflation. The event was a welcome opportunity for GWE Business West members to engage in some of the national debates and to raise their concerns directly with the Bank of England.

Nigel Hutchings, Director Chambers of Commerce, GWE Business West said: “As a leading business voice in the South West we welcomed the opportunity for the Bank of England to come to Bristol and to share their expertise with our members.  We are in interesting economic times and it is particularly beneficial for local businesses to hear about Monetary Policy and financial stability.”