There have been lots of bids and deals. Wages are picking up. Consumer spending is rising. House prices have been going up. The Bank should of course want to keep this recovery going, but it is time to start raising interest rates.
I have talked before about the very poor returns for savers. I have explained how the ultra low official interest rates have not been fully reflected in borrowing costs for companies or mortgage holders. I favoured mending the commercial banks more quickly to avoid the need to create so much new money and buy government bonds with it. Now the Bank is sitting on so much government debt, it needs to ensure that as the commercial banks get stronger it does not allow too much of this created money to find its way into new credit. So far wider money growth has not been excessive, and the tighter regulation of commercial banks has avoided inflation becoming a problem. We should now see faster progress in mending the weaker banks, as profits are retained, allowing more credit to be advanced.
In these conditions, making a start in getting rates up would send a signal to lenders and borrowers alike. It would begin to make saving more worthwhile. A balanced economy will need higher levels of saving and investment.
It may also strengthen the pound a bit against the Euro. As we import so much more than we export from the Euro area this would be helpful overall to our balance of payments, making the imports cheaper. Many of our exports are not that price sensitive, being based on good technology or service quality. A rising or stable currency prevents imported price inflation, the problem which helped cut living standards at the end of the last decade.
I see the Monetary Policy Committee of the Bank is moving towards action. It is a long road to a world where saving is more worthwhile,and the journey will start with modest steps which will not undermine the recovery. It is important that this cycle the Bank gets it right. In the last mega cycle, the “NO more boom and bust cycle”, I was permanently an opponent of what the Bank was doing.
Between 2004 and 2007 I wanted them to have higher interest rates, and to control bank credit by tougher requirements for cash and capital. I included this in the Economic Policy Review I wrote for the official Opposition in Parliament. In 2008-9 I was an outspoken critic of the Bank’s failure to put enough liquidity into the markets to avoid major disasters at several leading banks. In 2009-10 I was against the purchase of large shareholdings in RBS and Lloyds, favouring short term loans against security to prop up the important parts of their business which mattered to the solvency of the whole system whilst they sold assets and businesses to raise cash and the shareholders and bondholders took the hit for the losses. I was an opponent of the ABN Amro/RBS merger, and of the Lloyds/HBPOS merger. Let’s hope in this cycle the Bank acts ahead of problems and shows it has developed an understanding of the cycle.