Low rates may risk more severe downturns:BOE

Bloomberg

A prolonged period of low interest rates risks making economic downturns more severe, according to Bank of England (BOE) deputy governor Jon Cunliffe.
Speaking in London, Cunliffe said the drop in long-term market rates in developed economies partly reflected an over-pessimism about long-term prospects, and was also part of a structural trend.
One “challenge of low for longer for financial stability” is “the risk that in such an environment, economic downturns will on average be more severe,” he said.
“Low for long makes demand management of the economy more difficult in downturns, reducing the space for monetary policy easing with conventional tools” Cunliffe said. “This is because, for a given inflation target and with the reduction in long-run real rates, policy rates are closer to their effective lower bound.”
He also said the environment can also lead to “greater risk taking and less resilience in the financial sector.”
In the speech that mainly focussed on the impact of low interest rates on financial stability, Cunliffe didn’t talk directly about Brexit or short-term BOE policy, although he reiterated the bank’s mantra that “any future increases in rates will be limited.” He added that monetary policy “is not powerless at the effective lower bound.”
The speech comes amid growing signs of a split on the BOE’s Monetary Policy Committee over the correct way to react to a potential Brexit extension.