LONDON (Reuters) - Britain must complement the Bank of England's post-Brexit vote stimulus with a concerted government attempt to foster growth or risk unsettling volatility in financial markets, Allianz (DE:ALVG) economist Mohamed El-Erian said, the Financial Times reported.
The Bank of England cut interest rates to 0.25 percent on Aug. 4 and unleashed tens of billions of pounds worth of bond-buying in an attempt to ease the economic shock from Britain's June 23 vote to leave the EU.
"The BoE is forced to go to extremes to buy time until [Prime Minister] Theresa May's government formulates a comprehensive policy response," El-Erian said in a comment piece in the FT under the headline "BoE bond-buying need not end badly for markets".
El-Erian, chief economic adviser to Europe's largest insurer, said that ultimately the Bank's policies were prompting a generalised cascade of declining yields that had amplified as it spread to longer maturity bonds.
"But these investment gains come at a cost to the system as a whole; and it is a cost that could turn out to be considerable if the government does not follow through with policies that promote high inclusive growth," El-Erian said.
"These include structural reforms, a more balanced fiscal stance, agreeing with the EU a new free trade agreement and helping lead the way on better global policy co-ordination."
El-Erian said advanced economies such as Britain's were not designed to operate for long on ultra-low interest rates, which together with the associated flattening of the yield curve, made it hard for long-term financial services to operate and hit bank earnings.
He said ultra-low yields, if expected to persist for a long time, can encourage households and companies to disengage from the financial system and thus worsen the economic slowdown.
"If the government fails to implement proper policies, it increases the threat of unsettling volatility in other segments of the financial markets that, for now, have been beneficially influenced by lower British interest rates — be they stocks, high-yield bonds or emerging markets," El-Erian said.
Last month, Chancellor Philip Hammond said Britain could reset fiscal policy if necessary, though he gave no further details.