Ultra-loose monetary policy is one of the biggest risks to the global economy. Belatedly, the Federal Reserve raised interest rates this week. The Bank of England should follow suit.
There is no justification for record low interest rates. They were supposed to be temporary measure, in the wake of the financial crisis. Instead, they have become permanent. Indeed, the Bank cut them even further last August.
The consequences of artificially cheap credit are disastrous. It encourages consumers to borrow too much, banks to take excessive risks, and companies to buy back shares rather than invest in improving productivity.
Moreover, it transfers wealth from the asset poor to the asset rich. It is stoking a housing bubble that is preventing a generation from buying their own homes.
Central banks are reluctant to raise interests because they fear the only thing keeping the global economy afloat is consumer borrowing and spending. Yet they must know that is an unsustainable model.
Eventually, borrowers will default, and contagion will spread to the entire system – just as it did a decade ago. Compounding the problem with more debt will only make the ultimate correction all the more painful. (For more on this, see my paper After Osbrown.)
Yesterday, Kristin Forbes, one of the nine members of the Bank of England's Monetary Policy Committee, dissented from the majority decision to leave rates unchanged, and voted to raise them. Let's hope she persuades the rest of her colleagues next month.
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