Ben Broadbent: Monetary policy, asset prices and distribution Speech by Mr Ben Broadbent, Deputy Governor for Monetary Policy of the Bank of England, at the Society of Business Economists Annual Conference, London, 23 October 2014. *  *  *  I would like to thank Alina Barnett for research assistance and I am also grateful for helpful comments from other colleagues in particular from Richard Harrison, David Learmonth and Gareth Ramsay. The views expressed are my own and do not necessarily reflect those of the Bank of England or other members of the Monetary Policy Committee. A few years ago, I used to take the overground train into work. The line was cluttered with stations – mine was barely 400 yards on from the previous stop. So you can understand why my fellow commuters were less than convinced one morning when, seeking to explain why our train was 20 minutes overdue, the driver said this was “because we left the last station late”. It raised a smile. But it wasn’t an explanation. I confess I have a similar reaction to accounts that seek to “explain” low interest rates, and the behaviour of asset prices more generally, solely by reference to what central banks have done. This is especially true when those accounts go on to attribute significant and lasting redistributive effects to these policies. For example, and at least when they happen to be going up, it’s quite common to hear that equity markets are benefiting from “easy money”.
Chart 4  Chart 5  Real interest rates have also declined at longer horizons  Longer term yields insensitive to policy surprises  Source: Bank of England  Source: Bank of England and Bank calculations  QE is a different matter. As has been well documented elsewhere, announcements of asset purchases did have statistically significant effects on longer-term interest rates. Work at the Bank suggests that the combined effects of the various stages of QE reduced 10-year gilt yields by as much as 100bp. But it’s not clear for how long that effect has persisted: there are reasons to believe that asset purchases have a greater impact when markets are more illiquid, and have less capacity to absorb the flows. Most of the decline in longer-term real interest rates occurred before the crisis. And, in any event, the first point above still applies: judging by the subsequent behaviour of inflation, QE looks simply to have brought forward a decline in real interest rates that would have occurred anyway, only more painfully so. As the Bank of England explained in a Quarterly Bulletin article a couple of years ago, without QE we’d have experienced higher unemployment, lower wages and lower inflation. It’s hard to see bond yields rising in such an environment.