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Dear Sir Eddie
It is inconceivable that the MPC will continue to resist the rate cut which has been necessary so long, so our advice this month can be briefly given. The cut you will make is far too little far too late. The game has moved ahead of the MPC leaving it lagging behind events, rather than anticipating what is clearly happening and using its powers of management to ward off problems.
You should bring British interest rates down to the same level as those set by the ECB as a preparatory step to going below Europe’s to give the British economy the competitive edge it so conspicuously lacks. The reasons for urging an interest rate reduction larger than the one you will make are the same as those we have been putting for some time:-
- Inflation has consistently undershot your target. It is now likely to undershoot to such a degree that you will have to report to the Chancellor. This over-kill of caution amounts to a loss of growth, productivity and exports. You have been under-running the economy for no good reason and sustaining an overvaluation of Sterling which is doing deep damage to manufacturing and producing, quite rightly, a growing assumption that Britain is not a profitable base in which to invest or produce. If only because it isn’t.
- The economy is slowing fast. This process is better observed in such fundamentals as investment, stocks, production, redundancies and bankruptcies than in consumption, the froth on the top.
- It is difficult to see, and still more difficult to explain to business and the public, why the British economy should be out on a limb. Why should our interest rates have been constantly higher than those in the Euro? Why are they now higher than in the United States? The difficulty of competing in a single market with higher interest rates and a substantially overvalued exchange rate is as clear as it is damaging.
- The consequences of prolonged overvaluation, always foreseeable and inevitable, are now becoming palpable, not only in the closure of major plants but in the steady transfer of production overseas and the loss of manufacturing jobs. No-one can understand why nothing is being done . Your own hopes, frequently repeated, and that Sterling will fall and your propensity to clutch at every slight shift as the start of the substantial and necessary change, are not good enough. No-one can invest on Bank hopes. To offer only impotent wringing of hands is an abdication of responsibility. The problem is now and with the car firms unprofitable and Corus closing plants the public is battled.
- You can bring the Pound down but obstinately refuse to do so. This leaves producers with no alternative but to close or cut back, and government compelled to dole out subsidies to farmers, Nissan, Rover, and anyone else in danger of closing down. Unless the exchange rate is kept competitive public spending rises to sustain competitiveness and to pay for the consequences of its loss. In the long run this must be more inflationary than a competitive exchange rate boosting production and productivity.
- The American economy is slowing fast. That will affect us substantially as more dependent on it than other European counties. It will be compounded because we are not competitive in Europe because of the devaluation of the Euro. So no shifting to that market is possible while the Far East, a traditional market, is now in difficulties again.
- It is difficult to resist the view that the Bank has had an outdated view of inflation. It has taken all too little account of the new reality and the factors which, here and everywhere, have largely eliminated inflation as a real threat. Instead of giving the British economy the opportunity to grow which it has lacked for so long the Bank has indulged in the very old fashioned policy of fighting a non-existent inflationary threat by the damaging old method of keeping the Pound high, either deliberately or accidentally, so that imports are cheaper, producers are kept under pressure, and an under-run economy doesn’t produce the inflationary pressures the Bank fears. The MPC should ask itself whether this is not a realistic description of what it has done and should look at the consequences. Si momentum requiris circumspice.
The test of success of failure for the system of Bank management of interest rates lies not so much in "stability", in low inflation, in hitting easy targets, or in simple mysticism like the argument that the Bank is managing for events well ahead which the public cannot judge. It lies only in policies which are understandable and, therefore, acceptable and which have a demonstrable effect.
It is difficult to see that interest rates, higher than in competitive countries, and an exchange rate demonstrably too high and much higher than theirs, are understandable to investors or to business. It is difficult to see what the high interest rate policies are understandable to manufacturing or in the North. It is difficult to see that the Bank’s policy of keeping interest rates very high in real terms and doing nothing about the exchange rate except hope against hope can carry any conviction with anyone.
Perhaps this month’s reduction of interest rates will do a little to restore confidence but that will be as little as the cut itself. Moreover, it produces the inevitable question: if the Bank is anticipating events a year or two head, how did it let this country become so exposed and why do we alone require interest rates so persistently high?
When our inflation rate is lower and has undershot your target for 22 months the question which arises is is there something wrong with this country in the Bank’s view? Are we so much more inflation-prone than anywhere else that we have to be uniquely punished?
Central Bankers have always been too keen to put interest rates up to anticipate inflation and too slow to bring them down to counter recession. We can’t see what all the skill and wisdom of the MPC has done to modify such traditional, ingrained instincts. |
