The call for cuts
The pressure on the Bank of England to slash interest rates is mounting - if, indeed, pressure can be exerted on an independent body. The list of politicians who have near-enough called for a dramatic reduction in rates includes Gordon Brown, Alistair Darling and George Osborne. And today, in a persuasive article for the FT, Martin Wolf also states the case for a hefty cut. The whole thing's worth reading, but here's the crux of Wolf's argument:
"So what is to be done? The starting point has to be monetary policy. My increasingly strong view is that the MPC must, at this juncture, rethink its stance from scratch. It cannot make sense for US rates to be at 1 per cent, while the UK’s are 4.5 per cent. In present circumstances, I would like to see UK rates down to 2.5 per cent.Will these calls be met by the Bank? We'll just have to wait until 6 November to find out.Obviously, there is some risk of a further sterling collapse. In current circumstances, this has to be ignored. In fact, determined action may strengthen sterling, not weaken it. In his Mais lecture on Wednesday, Alistair Darling, the chancellor of the exchequer, helpfully gave the MPC the green light to ignore short-term inflation overshoots. He went out of his way, instead, to stress that the Bank enjoys 'discretion about the horizon over which inflation is brought back to target'.
So long as the Bank enjoys room to cut interest rates, it seems unnecessary to take any large discretionary fiscal actions, particularly since the fiscal position is sure to look ghastly."
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cjcjc
October 31st, 2008 11:07am"Short-term inflation overshoots" = much higher prices.
And unless there is subsequent deflation (the horror, the horror) then these will be permanent.
But who cares about those on fixed incomes or reliant on savings?
EyeSee
October 31st, 2008 11:27amIndependent!! That has always been as a big a joke as Gordon being a good Chancellor! They were given a specific job by Gordy to keep them out of his way. Now inflation could be an active player, he wants their 'independence' removed. Brown is responsible for the hopeless state of Britain's finanaces (if not actually for other, global issues) and Blair for the lack of moral rectitude. And some people STILL think voting for this pack of chancers is a good idea! Mind, a Conservative Party would be useful about now. Any sightings?
Kit
October 31st, 2008 11:49am"Obviously, there is some risk of a further sterling collapse. In current circumstances, this has to be ignored. In fact, determined action may strengthen sterling, not weaken it."
When Martin Wolf starts talking nonsense and clutching straws we should be worried.
Short the UK
October 31st, 2008 12:09pmKit - I agree Martin Wolf is confused.
Roger Bootle has been the best analyst we have in Blighty - by a mile. I find the FT second rate - apart from Alphaville. The FT said the Credit Crunch was blip when it first broke - I knew then it would be a disaster as the FT always gets the big calls wrong. Its pretty freaky!!
I see it this way:
Mega Caps - China, USA, EU, Japan.
Mid Caps - Russia, Brazil, India.
Small Caps - UK, Canada, OZ.
In the Small Cap. camp only one has run a fiscal surplus and has banks that are not in dire straights = Canada. Why is Blighty not like Canada?
Britain acts and thinks like a Mid Cap. but this grandeur has been shattered by the City going bust. Casino capitalism is doomed and thus the UK's main growth engine has gone ex-growth - it is in decline. More capital shall move East.
The past ten years of GDP growth was created by debt in the Public and Private sectors. Now the bubble has popped we could see GDP drop by at least 10% and unemployment rise to 14% as the service sector collapses.
Lower interest rates will do nothing to reflate the debt junkies who have no veins left to take a fix. Britain is about to go cold turkey.
The bubble addicts will do everything to get the debt junkies spending but will fail. After cold turkey in 2009. It will be detox in 2010 and Rehab in 2011. Recovery could start in 2012 if the bubble addicts get their policies right, if not we might never bounce back.
Tom
October 31st, 2008 5:11pmIn the UK we have now entered the era of Carnival Economics. A lot of people have to catch up on the meaning of this.