The weak UK retail sales data underlines exactly why the Bank of England need to keep monetary policy at a very easy setting. It is far too soon for the monetary sceptics to start thinking about no more QE. The UK economy is a long way off even moderate health. With retail sales dropping 1.3% in April after a 0.7% fall in March, the cracks in consumer confidence are clear to see. The pound in consumers’ pockets is being badly eroded by negative real wages, high energy and transport costs and the large bite being taken out by the government’s austerity policies. Rising taxes are taking a huge toll on consumers’ disposable incomes and confidence to spend.
There are two ways out of the dilemma. Either the Bank of England needs to drop interest rates down to zero and ply the UK economy with massive quantitative easing. Or else the government needs to effect a U-turn on its austerity measures and start spending for recovery and growth. What would work best would be a compromise on both sides. Rather than working in isolation and at odds, the Bank of England and the UK government need to work together with much more effective and long lasting counter-cyclical economic stimulus. The BOE seem ready, but the government’s commitment is sadly lacking.
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