Policymakers have become addicted to stimulus and risk stoking inflation when the coronavirus crisis is over, according to a former governor of the Bank of England.
Lord King of Lothbury said that central bankers were falling into a dangerous trap by pouring more money into the economy during downturns but failing to withdraw the support during periods of growth.
Speaking at the Royal Economic Society’s annual conference, he said: “What we’re confronted with now is a world in which policymakers seem to behave as if whenever there’s a bit of bad news, we inject a lot more money into the economy, we have more fiscal stimulus, but when things return to normal we don’t withdraw it.
“This ratcheting up of central bank balance sheets and government balance sheets, I think, is a real problem for the future.”
The global economy has been flooded with an extraordinary amount of stimulus during the pandemic. In the first two months of the crisis, governments injected $10 trillion into the global economy, three times more than the response to the 2008-09 financial crisis, according to McKinsey, the global consultancy. Last month President Biden pushed through another $1.9 trillion of stimulus, an injection that is expected to lift global growth this year.
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Markets have become increasingly worried that the economy will overheat when restrictions are lifted and that inflation will run rampant, causing central banks to turn off the taps and tighten policy.
The Bank of England has said that it will not tighten policy until there is clear evidence that the inflation target is being met sustainably. However, in its latest Monetary Policy Report, the Bank accepted that there would be a “sharp pick-up in inflation towards the monetary policy committee’s 2 per cent target,” this year.
Andy Haldane, the bank’s chief economist, has also warned recently: “Inflation is the tiger whose tail central banks control. This tiger has been stirred by the extraordinary events and policy actions of the past 12 months. It is possible that, as vaccinations are rolled out and some degree of normality returns, inflation will return to a stable state of rest. But, for me, there is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets.”
According to The Guardian, Lord King also said that record low interest rates were propping up “zombie companies,” which was weighing on growth and productivity. “People have failed to recognise that the problem is one that can’t just be solved by even lower interest rates or even more fiscal stimulus,” he said.
