Cheap money has become a 'addiction', warns Bank of England economist

Ultra-low interest rates and central bank quantitative easing have allowed politicians to borrow heavily, Hugh Pill told a conference in South Africa. Holly Adams/Bloomberg

Politicians around the world are addicted to cheap money, Bank of England chief economist warned.

Ultra-low interest rates and central bank quantitative easing have allowed politicians to borrow heavily, Hugh Pill told a conference in South Africa.

But now interest rates have risen, governments and economies are facing a «normalization process.» «It's going to be a very complex process,» Mr Pill said.

In July alone, interest on the UK public debt was £7.7bn, according to the Office for National Statistics. up from £6.2 billion in the same month of 2022 and from £3.8 billion in July 2021.

Mr Pill spoke alongside Lesetey Kganyago, head of the Reserve Bank of South Africa, which warned that governments should urgently limit borrowing.

“Treasury bonds need to be weaned off the chest. They are addicted to cheap money and act like they are richer than they really are. Treasury companies around the world were flooded with debt,” Mr. Cganyago said.

This was made possible because central banks saw themselves as “the only player in town, and so they took interesting measures that stifled bond yields.” .

Such cheap borrowing, he said, meant that governments could keep spending without thinking about the long-term health of their finances or economies.

and the structural side were shelved,” Mr. Cganyago said.

Mr. Pill said, “I fully agree with your comments about addiction.”

Raphael Bostic joined them from the US Federal Reserve, who said that Americans are also starting to worry about the spike in interest rates on homes, businesses and government debt.

«We're starting to hear more talk about public debt,» he said. «The amount of interest that will be paid on this debt will increase significantly.»

Mr. Pill added that government behavior also affects the cost of borrowing. He warned that last year's mini-budget, passed under the short-lived British administration Liz Truss, left markets confused by a lack of respect for the Office of Budgetary Responsibility (OBR).

feeling like we We were by a river that had a lot of crocodiles and we dipped our toes in that river, which was unpleasant,” he said.

“In this episode, this institution [OBR ] I think this called into question the broader institutional framework within which macroeconomic policy as a whole operated, including monetary policy. If we get to the point where these institutions are called into question, it can become a very destabilizing factor.”