Former central banker calls for normalizing interest rates

The Telegraph reports that former Bank of England Monetary Policy Committee member Andrew Sentance has called for interest rates to be normalized.  Specifically, he says that rates should be raised to the range of 2-3% to eliminate distortions that close to zero interest rates are causing.

Regular readers know that Walter Bagehot, the man who wrote the bookin the 1870s on modern central banking, said that interest rates should never be less than 2% because savers cannot stand it.  Clearly, Mr. Bagehot understood the economic headwinds that would follow pursuit of sub-2% interest rates.

Andrew Sentance, PricewaterhouseCoopers’ senior economic adviser and a member of the MPC until earlier this year, set out his opposition to another round of quantitative easing and said rates needed to rise to 3pc by 2015 to reduce the risk of “distorting” the economy.... 

While acknowledging the role QE played “in stabilising the UK economy in 2009 and helping bring about a return to growth”... 

“QE is running into diminishing returns and should not be further extended ... Indeed, persistent very low interest rates risk creating distortions in the economy and prolonging a period of persistent above target inflation,” he said....

To avoid future problems, Mr Sentance said “the MPC should consider a gradual increase in [rates] to 2pc-3pc over the next two to three years to return monetary policy settings to a more appropriate level. By setting out its strategy in advance, the MPC would help businesses and consumers plan for higher borrowing costs. And it would still be possible to move away from this path if the economy faced unexpected shocks.”... 

His proposal would benefit savers as well as businesses but would fly in the face of the policy of the US central bank, which has pledged to keep rates low until unemployment starts to get back to acceptable levels.

The fact that the US central bank would pursue policies that distort the US economy while hurting savers and businesses is no reason that the Bank of England should pursue the similar policies in the UK.