Low UK rates probably hurt productivity, BoE's Haldane says

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03/21/2017 | 10:17 am
LONDON (Reuters) - Ultra-low Bank of England interest rates since the financial crisis have probably taken a modest toll on productivity, but were a price worth paying to avoid higher unemployment, Bank of England chief economist Andy Haldane said on Monday.

Haldane - who voted last week to keep rates at a record-low 0.25 percent - did not address the short-term outlook for Britain's economy or BoE policy in a lecture to be given at the London School of Economics.

Instead, he focused on possible explanations for Britain's weak productivity since the financial crisis. Haldane said one measure, 'total factor productivity', had shown its longest stagnation in more than 200 years.

Low interest rates had probably played a role, by keeping some heavily indebted, unproductive 'zombie' businesses alive, Haldane said.

If the BoE had held rates at 4.25 percent since the 2008 financial crisis, productivity would likely be 1 to 3 percent higher, depending on how much of a drag higher rates had on productive firms that borrowed heavily to invest.

However, Haldane said interest rates at 4.25 percent would have imposed a "very significant macroeconomic cost" in terms of more people out of work.

"Should monetary policymakers have sacrificed 1.5 million jobs for the sake of an extra 1 or 2 percent of productivity? Hand on heart, I can tell you this one would not knowingly have done so," Haldane said.

Options other than higher rates offered a better way to boost productivity, Haldane said, adding that low rates could explain at most a fraction of the shortfall in productivity since the financial crisis.

A focus on exports and foreign ownership of companies tended to boost productivity, he said - without addressing how this might be affected by Britain's upcoming departure from the European Union.

He also pointed to a very wide divergence between Britain's most and least productive businesses, even within the same sectors and regions.

Most companies should be aware that they probably suffered from below-average productivity, and the most productive 'frontier' firms should mentor less productive ones.

"What would be in it for frontier companies? A more productive supply chain is clearly in their interests," he said.

(Reporting by David Milliken and Andy Bruce, editing by Larry King)

Reuters 2017
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