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Letter to Mervyn King August 2005 |
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Written by Austin Mitchell
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08 November 2005 |
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Dear Mr King
The Labour Economic Policy Group recommends that the Bank should continue the progress to lower rates which it began two months ago, by reducing interest rates by one half of one percent this month and indicating that the trend is down and that the Bank will be carrying out further reductions into next year, feeling its way to a lower level of rates to bring British interest rates to a more competitive level than the other advanced industrial countries, rather than keeping them at a higher level as we have for the past few years.
We urge this for a number of reasons, the most important one being that interest rates are the only effective instrument of economic management currently in use. It is essential, therefore, that they be used with a clear eye to the overall long-term needs of the economy rather than fiddled a few points up or down to give signals to the housing market and to focus on inflation.
The basic problem the Bank should consider is the fact that the pound has been for some long time grossly overvalued, subsidising imports and penalising exports. This gratifies consumers and keeps inflation down to the degree that it appears to be the only real inflationary strategy the Bank has (which prompts the humorous thought that the best anti-inflation policy would be to push the pound up ever higher and source everything from China).
The high pound is, however, deeply damaging to all forms of production in this country. It has led to a gaping balance of payments and trade. The Bank is the only body which can do anything substantial about either. It is your responsibility now to start to face up to this issue by embarking on a programme of progressive interest rate reductions to manage the pound down to more competitive levels. A fall in the exchange rate is the only politically acceptable solution to balance of payments problems (the alternative being to squeeze demand). It is the only effective way to expand demand. It is the only way to boost production and what remains of manufacturing in this country. Lower interest rates facilitate all three. Sooner or later the Bank will be forced by pressure of circumstances to face up to these problems. In our view it is important to begin now with a managed programme of interest rate reductions rather than have policy change forced on us at a later stage.
Domestic factors also point in the same direction. They are
(1) The increasing numbers of repossessions and insolvencies. These have been stimulated by the increase in interest rates. Both indicate that rates are now too high.
(2) The growing need for a further stimulus to the economy. The Bank was wrong in indicating that consumer demand is independent of house prices. It is flagging. Government spending has plateaued and may be squeezed. The only alternative to a wind-down which will easily gather pace is to stimulate demand, bring down interest rates and ease the burden of debt. The long term solution is to build houses, clean up cities and invest, but until that kicks in only an interest rate reduction can bridge the gap and boost growth.
(3) There are no indications that inflation justifies interest rates at these high levels. Insofar as oil and energy prices are a cause of inflation this is hardly best dealt with by higher interest rates. A transfer of demand and wealth to oil producers can only be countered by a boost in demand in consumer nations.
(4) We reiterate the fact that our interest rates are amongst the highest in the advanced world. That is no contribution to the expansion the world needs.
Our advice, therefore, is to embark on a substantial period of reductions and signal that this is your intention. Don`t listen to the fever of short term speculations – all contradictory. Look at the long term problems and your responsibilities there. |
