ben broadbent : monetary policy, asset prices and distribution speech by mr ben broadbent, deputy governor for monetary policy of the bank of england, at the society of business economists annual conference, london, 23 october 2014. * * * i would like to thank alina barnett for research assistance and i am also grateful for helpful comments from other colleagues in particular from richard harrison, david learmonth and gareth ramsay. the views expressed are my own and do not necessarily reflect those of the bank of england or other members of the monetary policy committee. a few years ago, i used to take the overground train into work. the line was cluttered with stations – mine was barely 400 yards on from the previous stop. so you can understand why my fellow commuters were less than convinced one morning when, seeking to explain why our train was 20 minutes overdue, the driver said this was “ because we left the last station late ”. it raised a smile. but it wasn ’ t an explanation. i confess i have a similar reaction to accounts that seek to “ explain ” low interest rates, and the behaviour of asset prices more generally, solely by reference to what central banks have done. this is especially true when those accounts go on to attribute significant and lasting redistributive effects to these policies. for example, and at least when they happen to be going up, it ’ s quite common to hear that equity markets are benefiting from “ easy money ”. but independent changes in monetary policy will ultimately be reflected in inflation and, despite a decline in interest rates that ’ s now gone on for 20 years, inflation has remained pretty close to target, throughout the developed world ( chart 1 ). this suggests that, rather than causing the decline themselves, central banks have instead been accommodating a deeper downward trend in the “ natural ” or “ equilibrium ” rate of interest. that is not a trivial matter : if they had failed to track this trend, policy would have been too tight and inflation and output too low. and although stocks performed well through the early part of that decline, for much of it they ’ ve not done so. chart 2 plots the yield – inversely related to the price – on indexed gilts and uk equities. through the 1990s these two markets tended to move together and, in price terms, generally upwards. since around 2001, however, their yields have diverged. equities have significantly underperformed bonds. this

et al ( 2013 ) ). but, over time, these movements have been uncorrelated with interest rates and most explanations, such as they are, involve more structural changes ( see, for example, karabarbounis and neiman ( 2014 ) ). bis central bankers ’ speeches chart 9 labour share of income relatively stable in uk source : ons and fred summary i read a lot of economic commentary that says ( i ) interest rates are low because central banks have chosen to keep policy rates low and ( ii ) this has pushed up the price of risky assets, benefiting only those who happened already to own them. i ’ m not sure either of these is true. to be sure, autonomous changes in monetary policy can affect asset prices. if the central bank decided to lower interest rates arbitrarily, for no other reason than that it wanted to, real asset prices would rise. but it ’ s unlikely the effect would endure for a very long time : the only lasting impact would be on inflation. and, in the real world, that ’ s not what ’ s happened – inflation has remained broadly close to target even as real interest rates, long as well as short, have trended downwards. this bears out, for me, that the real task for policy is to understand – and then adapt to – economic forces affecting the natural, or equilibrium rate of interest. 13 for a variety of reasons, and over a long period of time, this underlying rate has been driven remorselessly downwards. an official interest rate that might once have been considered inflationary is now contractionary ; failing to adapt to these changes sufficiently quickly would have depressed output and pushed inflation below target. and sharp falls in the equilibrium interest rates – which have probably not yet fully unwound – can be thought of as a significant driver of the substantial cuts in interest rates undertaken by the mpc in 2008 and 2009. as i say, those forces seem to have been at work for a long time, before as well as since the financial crisis. over that time they have had differing effects on the performance of risky assets. during the 1990s all asset classes did well – bonds and equities alike. at least in terms of wealth, that will have benefited anyone who happened already to own long - dated assets, mostly older people. but over the last 15 years, equities have done poorly. since 1999 uk and us equities have delivered a real cumulative return of only 2 %