Date: Tuesday 29 May 2012
In comments on Monday night at news agency Bloomberg, Bank of England (BoE) policy-maker, Ben Broadbent, argued that the elevated risk premia have created a higher ‘hurdle rate’ for companies' investments.
Furthermore, in his opinion two main observations follow from the above. The first is that firms may implicitly be guarding against the risk of a rare but very bad economic shock. The second observation is that those high hurdles may be stunting growth in the supply side of the economy.
As regards the former, Broadbent adds that, "we have, in the shape of the on-going financial crisis and the possibility of serious disruption in the euro area, a very plausible candidate for such a risk."
Worth pointing out, however, he believes that, even if such an event does not occur, the mere threat of it is enough to have significant effects on risk premia, expected returns, and firms’ decisions to invest.
Even so, says the banker, "it would be nice to think that these worries are unfounded … unfortunately, I doubt that’s the case. Markets and businesses possess "animal spirits" and can over-react to events. They may have done so again, but there’s probably a premium on risky investments because there is genuine economic risk."
Lastly, and as regards the possibility of further quantitative easing (QE) in response to the materialisation of those threats, he says that, "and, were the (still unlikely) worst-case risks in the euro area actually to be realised, then our own monetary policy would again play its part in mitigating the impact." That said, for Ben Broadbent these domestic interventions have their limits and "it remains the case that, for the time being at least, the most important policy decisions affecting the UK are being taken in other parts of the continent."
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