MNI POLICY: BOE Vlieghe: Equilibrium Real Rate Low, Going Down

--BOE's Vlieghe-Fiscal Consolidation Would Depress Real Interest Rates Further

By David Robinson

     LONDON (MNI) - The real equilibrium interest rate may have fallen and could

head lower still, Bank of England Monetary Policy Committee member Gertjan

Vlieghe said on Monday.

     Vlieghe's comments imply that the Monetary Policy Committee, even when it

gets round to tightening, may not have to hike to hit the equilibrium, and he

warned that fiscal consolidation following the Covid-19 hit could push down on

real rates, as could increased income and wealth disparities.

     In a question-and-answer session following a University of York event

Vlieghe said fiscal consolidation was more likely to weigh on growth in demand

and consumption, and "would depress real rates relative to the situation where

there was less fiscal austerity."

     "For me that is a clear downward effect. Real rates would stay

lower-for-longer than if you didn't do the fiscal austerity," he added.

     Evidence indicated that low real interest rates did not necessarily fuel

credit growth, he said, nothing that following the global financial crisis

central banks oversaw a period of private sector deleveraging, at least relative

to income.

     "The evidence that low real rates cause people to leverage up doesn't sit

with that," he said.

     Asked for his views on the real equilibrium interest rate, Vlieghe said:

"You don't need to work very hard to get results that imply changes of several

hundred basis points based on even quite moderate changes in the economy, either

the pattern of risk .. or relatively small changes in demographics."

     "It just makes me more convinced that this thing is moving around, that it

has fallen a lot in the last 20 years .. If you are talking over the next 10

years then I think the evidence is stacked in the direction of we stay low and

we might even go lower," he said.

     The MPC member also expressed sympathy with the view that increased

inequality, which could occur as a result of the Covid shock, would hamper

recovery in demand and depress real interest rates, with the less wealth off who

tend to spend a higher proportion of income being hit hardest.

     "If you have increased concentrations of wealth and income then that

changes the properties of consumption in such a way that in itself is going to

lower the real interest rate based on a marginal propensity to consume. If you

shift it towards people with lower marginal propensity to consume then that is

going to lower the real rate," he said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$]