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Letter to Mervyn King August 2003 |
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Written by Austin Mitchell
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07 August 2003 |
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Dear Mr King
We will make only a brief submission to this month`s meeting of the Monetary Policy Committee. Last months`s small reduction of interest rates was treated by the media as if it was a great surprise. It shouldn`t have been. The reduction was, in fact, both pathetically small and too long delayed. This month you should take the job you then began further by a 1% cut to be followed by a further reduction soon when the effects of the fall have been assessed.
It is difficult to see, and even more difficult to explain, why when the advanced world is facing a common problem of boosting demand so that growth can resume and the dangers of deflation be avoided, British short term interest rates are so much higher than those of any other advanced country. Not only are we not making an adequate contribution to a common effort, we are penalising our economy because the pound cannot in such a situation fund the appropriately competitive rate against the euro or the dollar it now needs.
The consequence is that the adjustment which began with the falling pound has now stopped and sterling is nudging up. This must have a serious effect in terms of the competitiveness of our manufacturing, its ability to restore the damage done by a decade of overvaluation, and its prospects for defending its markets in the USA, against the falling dollar, or taking advantage in Euroland with the rising euro.
All the domestic signals point to a reduction in interest rates. Nor is there anything in our inflation rate which gives any indication of why our monetary policy should be tighter than Europe`s. We realise that there has been a lot of criticism of the rise in personal credit and indebtedness. This is moralistic rather than economic. The people can hardly be blamed for using their credit to the full if it is made available to them and to argue that they should be punished by higher interest rates to teach them to be more responsible is totally unrealistic. Rather, if there is a big credit expansion and if this is (because of the effect of high exchange rate polices or manufacturing) one of the only two major drivers of economic growth (with government spending which is also the subject of a lot of moralistic indigestion) it becomes the responsibility of the Bank to keep interest rates falling now and low in the future because raising them will have such disastrous consequences on consumers at a time when unemployment is starting to rise. We know the lessons of negative equity and tighter credit from the past. Neither should be revisited until the economy has a higher and sustainable growth rate produced by investing and producing and an improvement in the real economy.
The critics of consumer credit also ignore the fact that demand is deficient. It should be boosted rather than reduced. The only way to do this is by lower interest rates, a more competitive exchange rate, plus expansion of credit and a boost to government spending. To complain about one aspect of this essential programme while nothing is being done about the others leads to disaster. Only an expansion of British production so that the economy can produce as well as consume can now restore balance. A monetary policy which ignores this is irrelevant to the real needs of the economy.
We, therefore, recommend a 1% reduction of interest rates now and a further 1% as soon as possible thereafter, rather than maintaining the present strategy of fighting inflation by keeping the pound higher than it would otherwise be. |
