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Dear Eddie
We were disappointed that the Monetary Policy Committee did not reduce interest rates at its last monthly meeting. A reduction is now long overdue.
So our advice this month is that you should heed the growing demand in Britain and overseas for lower rates but reduce them not by the quarter percent you are likely to undertake, but more substantially so as to give Britain lower rates than either Europe or the US (anticipating too that both might well come down). Britain needs a sustained, cheap money policy to stimulate economic growth, to bring down the exchange rate and to make a British contribution to the expansion the world needs.
(i) You have scope for a reduction. The inflation rate is below your target figure giving you a margin for a sizeable reduction to compensate for the fact that you have been maintaining too restrictive a policy and keeping interest rates too high at a time when discretion should have been exercised the other way. Inflation is not currently a problem. It is not likely to be, whatever the headlines say about public sector pay (largely a catch-up effect) or house price rises (not really your responsibility).
(ii) The British economy is visibly slowing. The consequences of a prolonged overvaluation are coming through in bankruptcies, redundancies and substantial transfers of jobs overseas. Britain needs a major expansion of demand.
(iii) Why are we alone not making any contribution to the expansion of world demand?
(iv) The pound remains substantially overvalued. In the light of the balance of payments situation it will be increasingly vulnerable. A reduction in rates, and preferably a substantial one, will be a clear indication that the Bank considers that the pound needs to come down and keep you in control of the fall rather than leaving you fussing behind events.
(v) We can see no conceivable reason why British interest rates, and particularly real interest rates, should be so much higher than those in Europe, the US and Japan. All three economies are stronger than ours, particularly in respect of production and manufacturing power. Our rates should be lower than theirs to restore something of our competitive strength. In Germany and Japan the financial sector clearly has problems but ours is sound and, therefore, better able to allow a reduction of interest rates.
(vi) Consumer demand and public spending have been the principal factors keeping the British economy growing. Both need lower interest rates to be sustained, consumers to ease the growing burden of credit debt and allow them to keep spending, government because otherwise a tax increase will at some stage be necessary unless the cost of the massive public sector investment we are undertaking is reduced by lower money costs.
(vii) It may be difficult for bankers and monetarists to adjust but we are in a new era of cheap money and low inflation. Here the traditional image that inflation is due to greedy workers so that manufacturing which employs them has to be punished by high interest rates leading to an overvalued currency is just not true. The danger is no longer inflation but deflation. Demand needs to be sustained not punished and money has to be cheap to encourage consumers and the state to spend. British producers need to be helped to maintain competitiveness to take an increasing share of the new demand. In that new situation dear money is not an effective tool of management, if it ever was. Finance`s contribution to competitiveness should be in the form of greater competition, cheap money and government spending to maximise demand.
(viii) In that new era the British economy is more fragile than those competitors who have not allowed the industrial and production base to shrink as far or as fast as ours has. Because manufacturing, industry and the sectors which supply both have been so badly damaged, surviving only by holding wages and cutting investment, we are now a low-wage, low-skill, under-invested economy which is bearing historically high levels of debt without the high wages or the productive power to ease the burdens. You can`t increase it so the only way interest rates can move in such a situation is down towards zero to keep credit flowing, the economy going and improve on such competitiveness as remains. To keep them at present levels, high in real terms or, even worse, to consider putting them up, are damaging. The rich and those who have benefited from the huge capital appreciation in assets and houses won`t mind much. The low-wage mass will be deeply harmed and their low spending power further crippled. As we pointed out in our last letter the fact that the Bank has got away with rates higher than most for so long is another facet of Rip-Off Britain with money doing its share of squeezing the consumer rather than an effective tool of management.
After the MPC vote at your last meeting and the growing pressure for a rate cut we think you will reduceinterest rates this month if only because anything else looks like standing unshook amidst a bursting world. A minor reduction will look what it is: too little too late and lagging behind events. You should go for a substantial reduction, put yourself ahead of the game, show that you are serious about stimulating the economy and bringing the pound down, and stake a place for Britain leading the way to cheap money rather than timidly hanging back behind everyone else. |
