The Bank of England deliberately stoked the consumer boom that has led to record house prices and personal debt in order to avert a recession, the former Bank Governor Eddie George admitted yesterday.
Lord George said he and his colleagues on the Monetary Policy Committee “did not have much of a choice” as they battled to prevent the UK being dragged into a worldwide economic slump by slashing interest rates. And he said his legacy to the current MPC was to “sort out” the problems he had caused.
Lord George, who headed the Bank for a decade from 1993, revealed to MPs on the Treasury Select Committee that he knew the approach was not sustainable. “In the environment of global economic weakness at the beginning of this decade… external demand was declining and related to that, business investment was declining,” he said. “We only had two alternative ways of sustaining demand and keeping the economy moving forward – one was public spending and the other was consumption.
“We knew that we were having to stimulate consumer spending. We knew we had pushed it up to levels which couldn’t possibly be sustained into the medium and long term. But for the time being, if we had not done that, the UK economy would have gone into recession just as the United States did.”
He said he was “very conscious” that stimulating consumer demand could give rise to problems in the future. “My legacy to the MPC, if you like, has been ‘sort that out’,” he said. Under Lord George’s governorship, rates were slashed from 6 per cent in 2001 to 3.5 per cent in 2003, pushing house price inflation above 25 per cent and high street spending growth to its highest since the late-Eighties boom.
In a wide-ranging discussion on the first 10 years of the MPC, Lord George also rejected suggestions that the MPC should target specific concerns such as soaring house prices, arguing that it was vital to take the broader picture of the economy.
Meanwhile, Kate Barker, a current MPC member, said in a speech last night that interest rate changes might become more frequent as the committee tackles volatile energy prices, rising inflation expectations and increasing pricing power. “This is a different kind of uncertainty from worries about demand which have been more usual during my time on the MPC, and I suggest that this may prompt a change in observed behaviour towards more frequent interest rate changes,” she told the CBI North East dinner.