Britain must complement the Bank of England's post-Brexit vote stimulus
with a concerted government attempt to foster growth or risk unsettling
volatility in financial
markets, Allianz economist Mohamed El-Erian said, the
Financial Times reported.
The Bank of England cut interest rates to 0.25 percent on Aug. 4 and
unleashed tens of billions of pounds worth of bond-buying in an attempt to ease
the economic shock from Britain's June 23 vote to leave the EU.
"The BoE is forced to go to extremes to buy time until [Prime
Minister] Theresa May's government formulates a comprehensive policy
response," El-Erian said in a comment piece in the FT under the headline
"BoE bond-buying need not end badly for markets".
El-Erian, chief economic adviser to Europe's largest insurer, said that
ultimately the Bank's policies were prompting a generalised cascade of
declining yields that had amplified as it spread to longer maturity bonds.
"But these investment gains come at a cost to the system as a whole;
and it is a cost that could turn out to be considerable if the government does
not follow through with policies that promote high inclusive growth,"
El-Erian said.
"These include structural reforms, a more balanced fiscal stance,
agreeing with the EU a new free trade agreement and helping lead the way on
better global policy co-ordination."
El-Erian said advanced economies such as Britain's were not designed to
operate for long on ultra-low interest rates, which together with the
associated flattening of the yield curve, made it hard for long-term financial
services to operate and hit bank earnings.
He said ultra-low yields, if expected to persist for a long time, can
encourage households and companies to disengage from the financial system and
thus worsen the economic slowdown.
"If the government fails to implement proper policies, it increases
the threat of unsettling volatility in other segments of the financial markets
that, for now, have been beneficially influenced by lower British interest
rates — be they stocks, high-yield bonds or emerging markets," El-Erian
said.
Last month, Chancellor Philip Hammond said Britain could reset fiscal
policy if necessary, though he gave no further details.
(Reporting by Guy Faulconbridge; editing by Michael Holden)
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