LONDON Feb 27 The financial crisis has
transformed the way people view risk so much that Bank of
England interest rates are likely to be below their historical
average for "a sustained period", a BoE policymaker said on
David Miles, a member of the BoE's Monetary Policy
Committee, said the "new normal" for rates was likely to reflect
how households, firms and investors attach a higher probability
to financial crises and economic downturns than in the past.
"The new normal for monetary policy will probably involve
setting bank rates on average at a lower level than before the
crisis," Miles said in a speech in London.
"One factor behind the recent sharp fall in real yields -
changing perceptions of the level of risk in the world - is
likely to be persistent."
The BoE has linked its record-low interest rates to the
amount of spare capacity in the economy, and policymakers have
stressed the economy will not be weaned off the stimulus of
ultra-low borrowing costs quickly.
Despite a recent resurgence, Britain's economy is still 1.4
percent smaller than its pre-financial crisis peak in 2008 - a
worse situation than almost all other big advanced economies.
Miles said short-term factors, like the government's drive
to cut the budget deficit and weak euro zone growth, were also
reasons rates were unlikely to return to their pre-crisis
average. But the fundamental change in perceptions of risk would
have a lasting effect, Miles said in his speech in London.
"I am not arguing that the neutral level of policy rate will
never be 5 percent again, but I think that for a sustained
period there are reasons to think that it might be lower than
that," he said.
The experience of events like the financial crisis - once
thought nearly inconceivable - has made low-risk assets more
attractive, driving down the real risk-free interest rate, Miles
That in turn should help to reduce the BoE's neutral level
of its interest rate - one that would reflect inflation a little
under the Bank's 2.0 percent target and at which slack in the
economy would be small.
In a newspaper interview published earlier on Thursday,
Miles said the greater difference between mortgage rates and the
BoE's rate would also keep a lid on the central bank's official
He also said that if and when the time comes for the BoE to
start selling its 375 billion pounds ($625 billion) of
government bonds, accumulated through its quantitative easing
stimulus, that would probably not have a big effect on the BoE's
neutral policy rate.
He cited research that suggested central banks will be able
to unwind their vast bond purchases when market conditions are
more normal without a big impact on asset prices and the real
"The bottom line is that I believe the neutral level of bank
rate is likely to be quite insensitive to decisions on when to
sell government bonds," he said.