Making people work for longer by extending the retirement age could help the Bank of England fight the next recession, a top policymaker has said.
Gertjan Vlieghe, a member of the rate-setting Monetary Policy Committee (MPC), said alternative measures such as raising the age at which workers retire could help the Bank stimulate the economy further as traditional policies have little room left to help.
In his final speech as a member of the MPC, Mr Vlieghe said: “Many countries, including the UK, are already slowly raising their retirement age, though it is by no means keeping up with the increase in longevity. The question is whether it can be increased more, sooner.”
As the population ages, and particularly in the years approaching retirement, people save more, pushing down the market rates and limiting the Bank’s capacity to stimulate growth.
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Mr Vlieghe admitted that poorer workers often have a lower life expectancy and that not all jobs can be done by older workers but said a shift towards working later in life was already happening.
He said: “The increase in the share of part-time work, and the flexibility to work from home, newly boosted by the pandemic, are likely to be helpful to keep older workers in the labour force for longer.”
He added that inequality could also reduce the space for the Bank of England to stimulate the economy, potentially making a case for higher taxes.
Mr Vlieghe said: “There is a pendulum that has swung from a high tax, high regulation environment to a low tax, low regulation environment since the early 1980s. To some extent that reflected genuine concerns about a stifling environment that impeded growth for all.
“But one might reasonably argue that the pendulum has swung too far, and that the low tax, low regulation regime combined with globalisation ended up widening income disparities in a way that not only hurt those at the bottom of the income distribution, but ended up having adverse macroeconomic effects; an undesirable high debt and low productivity growth environment that is simultaneously more fragile and reduces the policy space to fix it when it threatens to break.”
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The policymaker also suggested that the Bank should explore negative interest rates and shifting to digital cash as ways of fuelling the economy.
He said: “I would be comfortable with cutting the Bank Rate to -0.5pc or even -0.75pc the next time monetary stimulus is required,” he said, in his final speech as a member of the Monetary Policy Committee.
The effect of negative rates will be positive for the economy, he said, though each new rate cut might be less powerful than more traditional changes to policy in the past.
The Bank could cut rates further, but it would risk spurring businesses and households to take their money out of banks to hold cash, which would avoid the penalty of negative rates.
This could be avoided by shifting to a digital currency, a process which officials are considering but which currently appears to be some years off, if it can happen at all.
He added: “As central banks, including the Bank of England, are considering a move to central bank issued digital currency (CBDC), this constraint can potentially be moved more easily in the future,” he said.
“If digitisation becomes sufficiently widespread so that cash is used much less, this opens up the possibility of having more deeply negative interest rates in the distant future.”
For the time being, Mr Vlieghe expects the current setup of 0.1pc interest rates and the final £150bn of the quantitative easing programme to stay “in place for several quarters at least, and probably longer”.
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