Interest rates will fall so get on and do it now
It won’t help much but it won’t do much harm either, so if people want an interest rate cut, go on - let them have it.
Given a choice of inflation or recession, most people would rather cope with rising prices than disappearing jobs. The Bank of England’s only remit is to curb the rate of price increases however, not to keep the economy buoyant. Yet recession will do a better job at lowering inflation that the Bank can do.
As people cut consumption, prices temper. Commodities and oil prices have already come off their peaks; other items will follow. On the high street, retailers realise that to win sales they must be competitive, even if it means squeezing their own margins.
So inflation will tumble next year. For some items that will mean lower prices; for most it will mean lower increases but it will combine to do the Bank’s work for it.
Cutting interest rates would normally mean a fall in sterling’s rate, making imports more expensive and thus stoking inflation, but America’s troubles mean that some of the pound’s recent fall has already been reversed. A weaker pound helps exports however – which means jobs and thus keeps companies solvent, so helping avert the worst depths of recession.
The cut in the cost of borrowing will be minimal however. The turmoil in credit markets means margins over base rate have risen to offset any cut in the base and the saving on a mortgages will not put any significant extra spending power into consumers’ hands. It will certainly not revive the housing market.
But if it makes people feel happier, if it boosts consumers’ confidence, then give them the cut now. Putting money into the public’s pockets just before Christmas is the most efficient time for stimulating the economy.
This blog has previously pondered whether inflation will rise to 5 per cent before base rates fall from 5 percent. The inflation figure due on 14 October could reach that level: the Bank has a chance on October 9 to cut interest rates first.
This is the time to ditch the academic economics and give the economy the boost it needs. It’s going to happen sooner or later, so why wait?
September 30th, 2008 at 5:59 am
Mr Northedge get real if lowering interest rates is going to have little effect on the mortgage rates why bother, remember the older generation who rely on their saving investments to top up their inadequate old age pension, interest rates hold inflation in check and what’s the point of cheap money in one pocket to pay it out in the other with increased high street prices. It’s time that the advisors, politicians, bankers, and the men who control the everyday man and woman’s standard of living got into the real world.