Should the MPC cut interest rates now?

Readers will know I have wanted cuts in interest rates to stave off recession for many months. I have gone hoarse telling the MPC they have got it wrong again, lurching from too easy to too tight.

This week, instead of having their normal MPC meeting wasting time reaching the obvious conclusion that rates have been too high for too long and the economy is nosediving into recession and deflation, they should instead ask themselves what will the impact of the rate cuts we need be on the massive public debt the government needs to raise?

The Governor and his committee should spend a day penning letter to the Chancellor. It should say:

“Dear Chancellor,
We accept that we need much lower interest rates than currently, to lessen the depth and length of the recession and to relieve some of the mounting pressure on borrowers. We accept this is disappointing for savers, but we wish to avoid a situation where banks and the authorities are offering interest rates higher than the market can sustain. Iceland should be a warning to us all, where high savers rates helped push the institutions into difficulties.

However, we are concerned that as the government is now planning to borrow at least £120 billion this year compared with the Budget forecast borrowing of £43 billion, it will prove difficult to fund all this at low interest rates. We recommend immediate action to cut the borrowing volume by the government, to give us more scope to cut interest rates.

We think the Bank of England needs to be given control once again over raising government debt so we can co-ordinate our interest rate decisions with the issue of government bonds, to improve our chances of successful sales. We wish to avoid too much downward pressure on sterling allied to a reluctance by foreign investors to help fund the government deficit.

We appreciate that the elected government is responsible for the overall conduct of economic policy and must remain so. We do feel it necessary, however, to point out that if we proceed with big interest rate cuts in the absence of better fiscal discipline by the government, other problems could emerge which may be painful for both the government and the economy.

We await your guidance, as we do not wish to see monetary and fiscal policy undermining each other, which is the current danger.

Yours etc

When I first called for lower interest rates the government was not planning to increase borrowing by £55 billion to buy bank shares. This makes a huge difference to the wisdom of the policy.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.


  1. Nick
    Posted November 5, 2008 at 12:55 pm | Permalink

    Readers will know I have wanted cuts in interest rates to stave off recession for many months. I have gone hoarse telling the MPC they have got it wrong again, lurching from too easy to too tight.

    Part of the problem relates to the statement, "I wouldn't start from here"

    It's pretty much irrelevant what's gone on in the past, the question is how to get out of the quagmire.

    What principles do you want to apply?

    1. You can't let inflation get out of hand. We've been there before and its very unpleasant. It's effectively stealling off the prudent to pay for the feckless.

    2. We need to keep the economy going.

    I've a strong reason to believe that the first will be sacraficed for the second.

    More borrowing, means more taxes in the future and so will shaft the economy in the future.

    More borrowing is just more spending, and inflationary.

    More borrowing keeps the economy going in the short term, at the expense of the long term economy.

    I propose the following.

    1. Cut rates. It's inflationary, but it's needed

    2. Cut spending. Really cut it. It's deflationary, so balances out the rate cut. I would suggest 25% in the first year as the target.

    We can axe Crossrail, we can withdraw from the Olympics on grounds of fraud, we can axe the NHS spine, the ID card system, the potato council and lots of other quangos.

    3. Cut taxes. It's inflationary, but its efficient. People are better at spending than Brown or even Redwood! 🙂

    I would suggest increasing personal allowances to the level of the minimum wage, and slowly moving the minimum wage to the level of poverty, (poverty linked to inflation)

    Then look at abolishing transactional taxes. Stamp duty on shares and houses. Car tax can go. Simplification is all

    4. Increase saving.

    We need to move the government pension scheme to a funded scheme. All of them.

    So, all future government pension scheme acruals stop. Now. Then all future contributions are paid for directly, and they have to be funded. DC for all.

    Pension saving to be made compulsorary until you have enough income to get you the minimum income. If you don't make it at 65 from all your saving, you get a one off top up of fund to buy the annuity.

    Without the savings part, you won't get investment, and you won't have the funds to put the banking system on a solid foundation.


  2. Brian Tomkinson
    Posted November 5, 2008 at 4:49 pm | Permalink

    If the banks don't pass on the interest rate cuts to borrowers but merely continue to increase their margins at the expense of savers, how is reducing rates helping anybody except the banks? If the exchange rate falls further as a consequence of rate cuts thereby increasing imported inflation and reducing consumer spending power again how does that help non-exporting businesses in a recession?

  3. Acorn
    Posted November 5, 2008 at 6:35 pm | Permalink

    If the BoE cuts base rate by say 1%, as some suspect, what will happen to the Pound; are we heading back to $1.37, like we did in 2001? Will anyone want to buy our treasury bonds at lower interest rates denominated in a falling currency?

    Regarding this post and your previous "worrying figures" post. Can you tell us where all this financing will show up on the governments books? Will all this additional debt have to go through the "UK Debt Management Office" and be issued as Treasury IOUs?

    Is the DMO the organisation that you say should go back to being run by the BoE, how would that stop the government running a fiscal deficit?

    Having tried to understand the DMO site, I still don't have a clue how much Joe the UK Plumber and his Hockey Mom are on the hook for.

    On the DMO site ("what's new" tab) it says there will be a sale of £4000 million of treasury gilts on the 13th Nov. As good citizens, should we organise a whip round to support dear old Blightie?

    If you get chance this week-end John, would you please knock up a U.K. public debt post; just like this one for the U.S. According to this we hold $291 billion of U.S. Treasury paper; I wonder if we are "in the money" on that lot, with Gordon's luck, who knows.

    Reply: The UK government has to borrow the £18 billion for Santander, the £37 billion to buy the bank shares, and anything more they lose in nationalised ownership.

  4. Nick
    Posted November 5, 2008 at 6:46 pm | Permalink

    On the DMO site ("what's new" tab) it says there will be a sale of £4000 million of treasury gilts on the 13th Nov. As good citizens, should we organise a whip round to support dear old Blightie?

    That's because it isn't paying off debt, its constantly rolling it over and having to take out more loans to pay for the extra spending.

    The extra borrown is just the short term. ie. The difference between spending and taxation.

    The real nightmare is the trillions that the government owes to the general public for the state pension. That has no assets. Zero.


  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page