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Dear Eddie,
We hope that the consistency of our recommendations, which have long been for a reduction of interest rates, has impressed you by its relevance to the present situation which would have been less likely to arrive had our advice been followed.
Our purpose is to encourage investment and make the exchange rate more competitive by indicating that the Bank is determined to boost growth in the British economy through competitiveness. This consistency of purpose is in stark contrast with the wild fluctuations of alternative advice given by the fashion economics industry, most of whose practitioners move lemming-like from boom to bust mentality and from cut rates to (more consistently) raise them.
We are consistent again this month. You should cut rates substantially, not only to give a signal to exchange markets but to boost an economy where growth is fading while markets turn sour. We see no reason why real interest rates are so high when inflation is falling and largely almost out of the downside of your bands. Nor is there any justification for keeping our rates higher than those of the ECB and the Fed when our inflation is lower and our prospects equally adverse.
The economy first. The consequences of overvaluation are slow to hit home but are impacting on manufacturing and production in this country and on the balance of trade. Higher interest rates support a pound that is too high to allow British production to compete effectively. We assume that the dollar will come down because of the impact of the American trade deficit and stock markets on capital inflows. But if real interest rates are so much higher than those in the US there is no reason why the pound will come down as far or as fast. Lower rates would be an indication to markets that the Bank and Government want a more competitive exchange rate and a statement, in advance, that a fall will not be resisted.
Government spending second. The next Comprehensive Spending Review is good Keynesian economics but there will be artificially boosted fears that it is going to be difficult to finance without economic growth even at the low levels the Government now predicted. The expansion of Government spending is, of course, welcome on both public sector and Keynesian grounds but to make the necessary impact it needs the prospect of growth and an economy run to higher levels than the present dismal growth rates. Contrary to the predictions of monetarist masochists low interest rates should be an essential concomitant of higher spending.
Third inflation. We have long argued that inflation is a dead issue and en empty threat. A level so low gives the Bank much more lee-way for expansion and for rate reduction than it has taken. Why the caution when there has been no indication from the experience of the last five years that it is in any way necessary, right, or even sensible. Indeed, with Government spending now rising the need is for lower interest rates. If the Bank is to conjure fears of inflation lying ahead it should be at pains to predict the rates and explain why and in which sectors it is going to impact and what its impact will be on the wider economy. We believe the Bank cannot do this.
Given summer, uncertainty and the conflict of advice the MPC will have a natural tendency to hold rates. This would be an abdication. It should reduce them and substantially to put the UK ahead of the game and allow the economy to benefit from the great opportunity of growth without inflation which now presents itself. The Government’s policies and the Bank’s control of interest rates both seem to have succeeded largely because neither has been tested by crises similar to those of the Seventies. This is a negative achievement where the pressing need is for higher growth and a boost to production. An historic opportunity is being lost.
The praise the MPC has received should not be a counsel for sitting back in self-congratulation but for seizing the opportunity, which is being presented. Fail to seize that opportunity and new uncertainties will present themselves to which we are even more vulnerable unless we make good the ground lost by growth, investment and competitiveness now. |
