The Daily Telegraph - Saturday
Cheap money has become an addiction, warns Bank economist
POLICYMAKERS around the world have become addicted to cheap money, the Bank of England’s chief economist has warned.
Ultra-low interest rates and quantitative easing from central banks have enabled heavy borrowing from policymakers, Huw Pill told a conference in South Africa.
But now interest rates have surged, governments and economies face a “process of normalisation” that “is going to be a very challenging process”, Mr Pill said.
In July alone, interest on the national debt in the UK amounted to £7.7bn, according to the Office for National Statistics, a rise from £6.2bn in the same month of 2022 and from £3.8bn in July 2021.
Mr Pill was speaking alongside Lesetja Kganyago, governor of the South African Reserve Bank, who warned that governments must urgently rein in borrowing. He said: “Treasuries have got to be weaned. They have become addicted to cheap money and are behaving as if they are richer than they actually are. Treasuries globally have binged on debt.”
This was possible because central banks saw themselves as “the only game in town, and so engaged in interesting measures that suppressed bond yields”.
Such cheap borrowing meant governments could keep on spending without thinking about the long-term health of their finances or economies, he said.
Mr Kganyago added: “In that process the necessary reforms that were supposed to take place from the fiscal side and from the structural side got postponed.”
Mr Pill said: “I very much agree with your comments on addiction.”
Mr Pill added that the way a government behaves also has an impact on borrowing costs. He warned that last year’s mini-Budget, under Britain’s short-lived Liz Truss administration, sent markets haywire because of a lack of respect for the Office for Budget Responsibility (OBR).
He said: “That episode felt like we were by a river with lots of crocodiles in and we were dipping our toe into that river, which was not a comfortable experience.”