"with tighter monetary policy, we would create more slack in the economy – lower real income growth, and higher unemployment."
In a speech at Sheffield University, Vlieghe denied that low interest rates are counterproductive, arguing many savers also work and low interest rates “have helped lower the unemployment rate” and “have boosted wage inflation”.
He presented evidence that the additional income to savers from the improvement in the economy due to lower interest rates is similar to the additional income earned by borrowers.
Turning to the stance of monetary policy, he therefore believes that the current policy rate of 0.25% remains appropriate. Vlieghe said that if the MPC tried to bring inflation down faster, "with tighter monetary policy, we would create more slack in the economy – lower real income growth, and higher unemployment".
Vlieghe acknowledged that low interest rates have impacted defined benefit pension schemes, but said "there is no evidence yet that large pension deficits are weighing on business investment".
Additionally, he says that since the financial crisis, retired households have experienced faster income growth than non-retired households".
Vlieghe continued: "On the basis of this evidence, it is difficult to argue that during the period of very low interest rates, the plight of retirees has got worse. On the contrary, the evidence suggests it has got better.
"There is no evidence that monetary stimulus has hurt them, once the broader effects of monetary policy on employment, wages, profits and the prices of widely held assets are also taken into account."
In conclusion, Vlieghe asked: "Even if the Bank of England were to find a specific group that had suffered from very low interest rates, what would be the right policy prescription? Should monetary policy try to help them by tightening?
“The suffering group would get a larger share of a shrinking pie. As monetary policy makers, we are trying to meet the inflation target by growing the pie in line with potential, and letting the government decide how to divide it up, using its fiscal and structural policy tools. Monetary policy cannot solve distributional issues, and should not be asked to try.”
