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Dear Mervyn
We recommend that the Monetary Policy Committee should reduce its base rate by l% this month. Our last recommendation was for a reduction of one half per cent. This month the reduction needs to be greater because it`s clear that the Bank does not realise either the seriousness of the credit squeeze being imposed on the country or its consequences. Indeed after the Bank’s mistakes in August over liquidity and the Northern Rock there appeared to be a touch of sulky defiance about last month`s refusal to budge or to follow the wiser stance taken by the Fed and the Eurobank.
1) There is no clear reason why our interest rates should be higher than those of our major competitors. Inflation is below your target figure. This clearly allows scope for a reduction which would in turn help reduce inflation. The MPC should regularly publish a comparison between our rates (and inflation rate) and those of other banks and explain and justify the differences.
2) The only solutions to the present tightening of liquidity and the difficulties faced by Hedge Funds and financial institutions is more liquidity and lower interest rates. The Bank is there to manage the economy not punish it.
The same sub prime problems which have developed in the US because of the unsuitable lending, sustained by the ability of institutions to sell on their bundled debt which has had such a disastrous effect on Banks and other institutions stuck with the bundles also exist in this country. Here thousands of borrowers are now moving on to higher rate payments. Thousands of others are unable to keep up their payments, many even being driven to use credit cards to make monthly mortgage payments. Many lending practices, all condoned by the Bank and allowed by the FSA, have encouraged the same lax lending on the same basis as the US. No use moralising about what’s been both legal and accepted. The only way to bring relief and stop repossessions compounding the problem and undermining financial markets is to reduce interest rates and ease the burden.
3) The Bank clearly feels the need to check the house price explosion almost as a matter of morality. Whether it should be operating on the demand side when the Government is handling the supply side so badly, is a matter for conjecture. Yet the Bank certainly does not seem to understand the dangers of a fall in house prices which may now be beginning and which the IMF is predicting here. Any fall creates the danger of a snowballing effect with cataclysmic consequences for consumer demand and a general retrenchment as negative equity becomes a major problem. Having tolerated, even encouraged, the rise there is now no alternative to sustaining the market by lower interest rates.
4) The general prediction is that growth is slowing here as well as in Europe and the US. The Bank has it in its power to check this and re-boost the economy by a progressive reduction of interest as the Fed is now sensibly doing. It should use this weapon. Low growth increases costs and taxes and reduces productivity. All these are more important inflationary pressures than the growth we have had for the last ten years.
5) The Bank has done nothing about the growing overvaluation of sterling except to compound it. The dollar is coming down with beneficial effects for US manufacturing and exports, indeed this is the main factor sustaining growth in the US and neither the Fed nor the Treasury really care about the exchange rate. Benign neglect is working for them. It is, however, very damaging to us because the l4 % of our trade which goes to the US is now suffering. We will lose dollar markets unless the pound comes down pari passu.
The euro is on its way up with damaging consequences for growth in Europe and particularly France. Since more of our exports go to Europe this should, in theory, benefit us. In fact it doesn’t and won`t unless the pound comes down. Firstly because the European market is now so tight and competitive that we are losing out there too. Secondly because the improvement in German productivity and industrial strength produced by years of investment and greater efficiency, coupled with the integration of the East, now give Germany a commanding position in EU markets. Including ours.
No use railing at the Chinese to get their exchange rate up. This didn`t work on the Germans or the Japanese in the sixties and it won`t now. The only response which works is to get our exchange rate down. Why doesn`t the Bank publish its predictions on competitiveness and its effect on exports?
6) The Bank well understands the increasing dominance of finance and financial services in Britain. This sector will be badly hit by the strains produced by tight liquidity, reduced lending and dear money. Having delivered a substantial blow to the reputation of London which will be compounded by the continuing American and the emerging British sub prime problems, the Bank must run a more accommodating policy if it is to help Finance.
7) Wage costs are being kept down by immigration. They are not a serious pressure on inflation. Those factors which are: fuel and utility prices, the Bank has no control over. There are indications that the figures may understate wages growth but this comes from pay of executives and City bonuses (which will be lower next year) not average wages which are still kept down by international competition and immigrant cheap labour.
We have regularly emphasised the importance of getting the pound down by lower interest rates and the need to manage and stimulate the economy in the way the Fed does in the US. It would be useful if the Bank, instead of concentrating so heavily on inflation and doing so much (usually by faith) to predict inflation two years ahead, took more steps to predict the consequences of its decisions, negative or positive, on growth and competitiveness. These too have consequences for inflation.
It is certainly clear, and becoming clearer to everyone who takes an interest in these matters, that the Bank`s policy of trying to control inflation by interest rates alone, is not only futile but failing. The Bank has been trying to impose its morality on the system by punishment through dear money. This is as useful as trying stop the plague by sermons. Dear money has been a British financial obsession for far too long and should not be prolonged by the Bank pretending that it is managing inflation by damaging the economy and its competitiveness.
We are anxious about the prospects of low growth coupled with heavy debt burdens which lies ahead. The Bank should be too. With a bubble economy reversals can be sharp and compounding. As Vergil put it “Facilis Decensus Averno”. Don`t let it happen. |
