Letter to Eddie George November 2000

Written by Austin Mitchell

01 November 2000

Dear Eddie Our advice to the MPC this month is unchanged. Reduce interest rates by 2% and get the Pound down to a more realistic valuation. Only this will allow Britain to compete on level terms in the Single European market, boost an economy which has been growing at well below the rate both possible and necessary, and allow producers a prospect of profitability and investment. Recognising that the committee has always been cautious and prefers to make only marginal changes to interest rates (and over the past few months none at all) we would suggest that the very least you should do is reduce interest rates by one of your half percent moves. This will have minimal benefits and do no damage but it will give a signal to markets that rates have turned, the future direction is down and relief is on its way, if not immediately available. We urge you to do this for the following reasons :-   There is a clear, pressing and long standing need to get the Pound down. You have agreed that it is overvalued. All responsible commentators concur though disagreeing on the scale of the necessary fall. The longer you delay the signal that you want the Pound down, the greater the fall necessary to recover the damage which it has been doing for some years to the manufacturing base and to trading patterns geared more and more to importing rather than domestic production.   You cannot change the value of a Euro which is undervalued. Your often repeated hopes for a Sterling fall without intervention have not materialised. You now have a freedom to act and some ability to stay in control of the situation. Both will be lacking when relativities begin to change and the Dollar comes down in response to the gaping American trade deficit. We can safety decouple now. Then you will be under pressure to put up rates because of fears of currency instability and inflation. Both fears will be wrong but having enjoyed the benefits of overvaluation on inflation and claimed that a successful result of your policy we fear that you won`t accept that what goes up must come down but will then succumb to pressure and impose still higher rates on British producers just when they need competitiveness and face a threat to Dollar markets which will not necessarily be compensated by the long awaited rise in the Euro.   The economy is slowing. It could slow faster than predicted. It needs a boost now, not when it is really locked into a wind down which is inevitable, however long postponed. The boost from a half percent reduction won`t be substantial but will be a signal that more will come if the stalling goes on.   You have the leeway for a reduction in rates given that inflation remains below your target and shows no real sign of rising above it. We repeat our view that inflation is not now a serious problem and is unlikely to rise in this highly competitive world. Indeed, it is now mainly a bogeyman to justify keeping interest rates higher than they need to be and to excuse present pain by invocations of future fear which are a really incredible product of 1970s thinking.   Such fears arise because of outdated attitudes inherited from the old economy of powerful unions, wage inflations, a weaker exchange rate, and rising raw material prices. All are now irrelevant. The claims made for the new economy or new paradigm may be overstated but the painful restructuring of the Eighties and the huge investments in computers, I.T. and the Internet in the Nineties, plus the new competition, and distribution systems, should have enabled much faster growth than the pathetic, and historically low level, Britain has enjoyed in recent years. The economy can do better. It should be both allowed and encouraged to do so. A great opportunity to grow is being lost. Real damage is still being done to the production base by which we live all on the basis of fears about inflation which are unrealistic and a lack of confidence which is pathetic. Our rates are higher than Europe`s yet our inflation is less which is incredible. Unless the Bank adjusts policy to the new realities and acts to deal with manufacturing failure it will have done its bit to end Stop Go by returning us to Stop.

 

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