The true cost of cheap money: an interview with Andy Haldane

Britain’s economy is growing at the fastest rate in 200 years. Job adverts are 29 per cent above their pre-pandemic levels and employers say they can’t reopen because they can’t find staff. Wages are rising at the fastest rate in ten years. But here’s the question: how much more support does the economy need from the Bank of England’s printing press? Should the BoE stick to its pledge to bring QE up to £895 billion or stop £50 billion short? Its members met to discuss this last month and decided (as they always do) to press ahead — by eight votes to one.

The dissenting vote — the first time a member has voted to roll back QE — was cast by Andy Haldane, the Bank’s chief economist, who has been working for the institution for more than 30 years. He narrowly missed out on being made governor in 2019. A few months ago, he announced he was leaving to run the Royal Society for Arts. This places him in a highly unusual position for a central banker: he is able to speak his mind. ‘It’s real money,’ he tells me when we meet at The Spectator. ‘We absolutely should be asked to account for what impact our actions have had.’

These actions have saved the government: had the Bank not printed more than £400 billion, Rishi Sunak may not have been able to pay the wages of millions of people for over a year. They have accelerated political shifts too: supposedly conservative politicians can’t name a single infrastructure project they’d cut or a spending programme they might trim in response to the £300 billion we’ve just borrowed. Haldane has come to believe that it’s time to draw the line.

‘It wasn’t clear that the additional stimulus, the additional fuel needed to be poured on what was a pretty well-stoked fire already,’ he says. ‘The UK economy’s probably within a few per cent of its pre--Covid level.’ And yet, he says: ‘We’ve got this huge double--barrelled monetary and fiscal response which will be pushing that reaction of the economy back above base.’ The barrels he refers to are the BoE’s QE and Sunak’s tax cuts to stoke the recovery.

The job of a central banker, he says, is to ‘remove that punch bowl’ before the party gets out of control. ‘If we keep on pouring the punch, tomorrow’s hangover will be bad.’ It might not feel quite like a party, now that the 21 June celebrations have been postponed, but what haunts Haldane is that the remedy so liberally applied — borrowing money to fund lockdown — will create a new problem: a debt-fuelled bubble that is set to burst.

Unlike the fallout from the financial crash, which resulted in ‘acute risk aversion’, the pandemic could spring us into another Roaring Twenties, as people make up for lost time. In a way, it’s a heartening image. But therein lies the risk to the UK’s long-term economic recovery: the joys of freedom are also a ‘recipe’ for a ‘price push’ that Haldane fears could spiral out of control.

‘It’s a mug’s game to be forecasting inflation,’ he insists. But ‘the balance of risks’ is now ‘tilted very decisively in the direction of that upside risk’, especially as Joe Biden has embarked on a spending spree. This week we learned that inflation jumped to 2.1 per cent in May, above the Bank’s target and economists’ forecasts. If this trend continues, the cost of borrowing will rise — no small deal for a UK government still dependent on borrowing vast sums to finance its day-to-day spending. A 1 per cent rise in rates means finding an additional £25 billion just to service the debt.

Does he regret pumping so much money into the economy over the past year, feeding the addiction to cheap money? He looks slightly torn. ‘I sort of cleanse my conscience on this. Had we not taken those QE actions, 12 years ago and recently, I reckon between 500,000 and a million more people would have been unemployed.’ But there’s no doubt that cheap money pushes up asset prices — and made the rich a lot richer. A price worth paying, he’d argue, for keeping unemployment relatively low.

But he doesn’t see inequalities soaring this time. Rather, he sees a power flip, whereby employers will have to compete for workers, offering higher pay and more training. Up to a million migrant workers are thought to have left the UK during the pandemic, and new ones may struggle to get a visa under Priti Patel’s new immigration system.

‘So the flow of migrant labour, certainly from the EU, has dried up,’ he says. ‘The past has been one in which we relied on an expanding workforce and low productivity. We have switched to an equilibrium of a contracting workforce but with expanding productivity.’

‘That will be the hope’, he continues, ‘that [this is] the combination of Brexit and Covid’ — i.e. that employers invest more in their workers. ‘The skilling-up incentives will increase, in a way that could be good for the productivity of those workers.’

But higher wages don’t mean much if they are inflated away. And the pressure is on for the government to deliver on its many spending commitments. The discovery of the magic money tree has many wondering why more can’t also be found for the climate emergency, the education crisis or the NHS.

These are all issues that will require politically difficult choices, says Haldane, and at some stage, ministers will have to stop borrowing their way out of every problem. ‘Cheap money is not the solution to any of our structural problems in the UK economy. That is about innovation, investment, infrastructure, skills, levelling up, none of which (the Bank has) the tools, the trade to do anything about. The past decade was one in which central banks were indeed masters of the universe. The next decade must not be that.’ In other words, it’s time to give the Bank’s tools a rest. ‘Normalising monetary policy will ease off this dependency culture on cheap money.’

Not a bad idea. All we need now is someone to persuade the Prime Minister.