Exclusive: Bank of England ‘won’t risk recovery’, says Minouche

Minouche Shafik, the new Deputy Governor of the Bank of England. Picture by Simon Hulme
Minouche Shafik, the new Deputy Governor of the Bank of England. Picture by Simon Hulme
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BUSINESSES MUST increase productivity, investment and exports to ensure a lasting economic recovery, according to the new deputy governor of the Bank of England.

In her first interview since taking on the role, Minouche Shafik discussed the risks to the rebounding UK economy, the need for more growth-orientated policies in Europe and when to start unwinding the Bank’s £375bn quantitative easing scheme.

She said the economy has been growing faster than many had expected at 3.2 per cent.

Ms Shafik told The Yorkshire Post: “The recovery is encouraging. The real question is how can we make this recovery sustainable.

“We don’t want to take risks with this recovery. It’s been a long recession and I think that’s going to be the biggest challenge going forward.”

On the question of when to increase interest rates, she said she would be closely watching the relationship between wage growth and productivity. She said there are mixed signals about the strength of that growth.

“If wage increases are expected but productivity is performing well we can wait for longer; if those wage increases are not accompanied by productivity increases then I think we will have to move more quickly on rates because inflationary pressures will build up.

“I think that’s the key choice that we face,” said Ms Shafik, who has so far attended two meetings of the Monetary Policy Committee.

Ms Shafik said businesses have to sustain investment, which has recovered quite rapidly over the last year after banks and companies cleaned up their balance sheets and paid down debt.

She said that while the UK is starting to shift from consumption to investment, it has so far failed to rebalance away from domestic consumption to exports, partly because of the slowdown in Europe.

Ms Shafik warned the eurozone presents “a significant risk” to the UK economy and highlighted concerns over low inflation.

The European Central Bank has recently moved to cut interest rates and announce an asset purchase scheme to buy debt products from banks.

“We hope that will work but of course everyone knows monetary policy can’t do all the heavy lifting and so there needs to be more growth-orientated fiscal policy and structural reforms to make the big economies particularly in Europe, France, Italy and so on, more competitive,” said Ms Shafik.

She added that the economic impact on the UK economy of instability in the Middle East “so far has not been huge”.

In her new role, Ms Shafik’s responsibilities include the unwinding of the Bank’s massive £375bn asset purchase programme.

The programme to buy mainly gilts - Government debt - was introduced in the depths of the downturn to inject money into the economy to keep it afloat.

Asked when the Bank might start selling those assets, Ms Shafik said: “It would make sense to wait until interest rates have gone up to a level where if we needed to change gear and loosen policy we could materially reduce them from that level. Only then does it make sense to begin to sell assets.

“The other key thing is when you do sell assets it is not something you want to be turning on and off; you want to have a clearly well-planned, orderly pre-announced programme of sales, which wouldn’t disrupt markets. But it’s still a way away.”

She said the Bank’s balance sheet is “very strong”.

Ms Shafik made the comments during a visit to Leeds yesterday to meet with representatives from the Yorkshire business community.

She said many firms are looking at “northshoring” operations to Leeds and other cities in the North, which she welcomed as a good example of companies rethinking their business models to become more productive.

Ms Shafik also welcomed the example of a Yorkshire company which had reduced its manufacturing operations and invested in design instead, with the “essential” effect of increasing both wages and productivity.

Deputy is an owl, not a hawk or dove

Members of the Bank of England’s Monetary Policy Committee tend to be characterised as hawks or doves.

Nemat ‘Minouche’ Shafik had an intriguing response when quizzed on which description was most apt for her.

“I asked my children this question and they said, ‘Mummy, you should say you’re an owl’,” she told The Yorkshire Post. “Look at the data, try and be wise.”

Ms Shafik was deputy managing director of the International Monetary Fund before starting her new role at the Bank of England.

She said her first few weeks have been “full on”, with a meeting of the Monetary Policy Committee on her first day in August.

Ms Shafik, who was born in Egypt, said that some aspects of the Bank are very traditional, but said that most of the organisation “looks pretty much like the rest of the UK” with a mix of people and backgrounds.

Her newly-created role makes her the most senior female at the institution since the departure of deputy governor Rachel Lomax six years ago. She is also the first woman to join the MPC for four years.

Asked if females have been under-represented, she said: “In my experience after I was appointed there was another woman appointed, Kristin Forbes, so we are now two on the MPC, we are also two on the Financial Policy Committee and we are two on the Prudential Regulatory Authority board so it’s a bit like Noah’s Ark, we come in pairs.”

Ms Shafik said she brought an international perspective, having worked on lots of different economies and faced lots of different challenges.

Yorkshire firms finding higher levels of productivity

Minouche Shafik told The Yorkshire Post that the businesses she met in Leeds “were encouraging in terms of how companies are finding their ways to higher levels of productivity, higher levels of efficiency, being able to pay higher wages”. She added this “is going to be key for making this recovery really lasting and sustainable”.

Ms Shafik said wage increases without rethinking business models, redesigning work and inceased value-added activity will not be sustainable and in the worst case will be inflationary “and that will be a bad thing”.