Don’t cut interest rates Mr Carney

Government and the Bank cannot control the level of the pound. The last time they tried to do this in the European Exchange Rate Mechanism it was a disaster, leading to a big devaluation and a recession. We do not want that again.

The Bank and government can, however, influence the level of the pound. In recent weeks the Bank has done its best to encourage devaluation, by talking of the likelihood of a decline, talking about the decline as it happens, and signalling still looser money and lower rates. These policies seem to be designed to drive the pound down further.

I do not have in mind an optimum level of sterling which we then need to hold. I do however think the decline we have seen should not be pushed further by official action or encouragement. We need a sense that the authorities think it has gone far enough. There should be doubt in market minds as to whether or not the authorities might buy pounds in the market. The Bank should not decide in advance to cut rates.

According to the press, and from reading the latest Bank statement, Mr Carney thinks there is a decline in confidence in property and consumer spending which warrants a strong monetary response by cutting rates and printing more cash. This week British Land sold its flagship store on Oxford Street for a remarkable £400 m, on the very low yield of 2.75%. At recent commercial property auctions property has sold well, above guide prices. In response to my consultation on this site several people wrote in to report lively business in residential property in their local areas. There are many people and institutions sitting on the sidelines with cash wanting to buy any bargains that the property funds might offer as they seek to meet redemptions.

Retail sales were remarkably strong in May and could have fallen off a bit in June and early July. However, employment levels are high, and real wages are rising, so there is no obvious reason to expect a medium term drop off in sales. The move from shop to web complicates the picture and needs to be allowed for when looking at individual store group sales.

The economic evidence suggests that the UK economy has just had a stimulus from monetary relaxation and the fall in the pound, which should boost the growth rate next year. It would be wrong of the Bank to take actions now that drive the pound much lower. It is possible to undermine confidence by ostensibly taking action to assist.

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54 Comments

  1. Posted July 11, 2016 at 5:22 am | Permalink

    Exactly.

    There are far better things for Carney to do. He keeps assuring us that the banks are lending freely he is simply wrong. They are not at all, how can he not know this given his job? The government owned RBS does not seem to have any appetite to lend at all and is even selling off old good loan in desperation (to pay the wages of top staff perhaps) and they are not the only ones. Carney should go and educate himself on the true position in bank lending where red tape, slotting rules, liqidity problems, capital restrictions, high fees and margins are holding many sensible business and investments up and damaging the economy.

    Many banks have all sorts of silly and irrational restrictions on lending, anything outside the usual boxes can be hard to fund. Anything below about 5 million outside standard boxes too.

    • Posted July 11, 2016 at 5:53 am | Permalink

      Meanwhile it is reported that Theresa May is now demanding that businesses share their profits with staff. This A continuation of the very silly and totally misguided Osborne think. They already do dear did you not noticed? It is however best left to the businesses and employees to decide on how to do this. Not some silly, lefty politician, playing to the gallery and who think she knows best how to run businesses, when they have never run so much as a whelk stall. Trying to run businesses that they know nothing whatever about, and have never even visited, by remote control is bonkers.

      If she wants to run a business let he start her own with her own money, she might learn something.

      Now Mrs Leadsom apologises and says having children has no bearing on someone’s ability to be PM. Of course it does, as does any other experiences, your age, your intelligence, your health and countless other things. If nothing else it gives you an understanding of the damage done by for example inheritance taxes or the problems of child care, or work life balance problems. Can no one ever tell the truth anymore without being castigated?

      What is needed most however is a working compass. Heath, Wilson, Major, Blair, Brown, Cameron all had one that was about 180 degrees out. May seems to have a rather broken one too. The compass should say, far smaller government, far less red tape, efficient public services in the very few areas where the state can actually do it better, democracy, freedom, no counterproductive wars, easy hire and fire, cheap reliable energy, no climate (or other) daft alarmism and far lower taxes. In short it should say to leaders, get out of the bl**** way.

  2. Posted July 11, 2016 at 5:38 am | Permalink

    Good morning.

    Sage advice from our kind host.

    A good salesman sells his product on its strength not its weaknesses. True, a weaker pound will help exports but it will also make imports of raw materials more expensive eg oil.

    The BoE needs to tell things like they are but, it has to make sure that it can put a more positive spin on things and make a case for the UK economy.

    Clearly someone is not in charge of their brief.

    • Posted July 11, 2016 at 7:49 pm | Permalink

      JR, this is assuming that this is not part of the continued scare story to make us change our minds or accept an EU light deal.

  3. Posted July 11, 2016 at 5:39 am | Permalink

    “the Bank [of England] has done its best to encourage devaluation, by talking of the likelihood of a decline”

    No it has not, the Brexit vote did that as you well know John, stop trying to talk down the BoE all the time, just because it upsets your politics…

    If you really think there is a problem in the BoE or how it is being run stop winging here but go and place an urgent question or what ever before the House to that effect, calling for either a change of governor or the removal of the Bank of England’s independent status.

    • Posted July 11, 2016 at 9:48 am | Permalink

      Agreed Jerry. There is no such thing as an independent central bank in a fiat currency economy, we are not on the Gold Standard any more. Neo-liberal monetarists have never understood this fact. And, they still think the government has to borrow its own money, before it has any money to spend; even though the Treasury is the sole owner of the printing press for the Pounds Sterling. Whole of Government Accounts, now consolidate the Treasury and the BoE as one entity.

      Even next door’s dog now knows that one of only two tools the central bank has; QE, does not increase demand in the economy, it just distorts asset prices. The other tool, interest rates, are supposed to have a zero % lower bound (ZLB) which is cash money. Cash is inconvenient for big players so holding government paper at negative interest rates (a tax on reserves), is tolerated by money funds that are allowed to hold such.

      Anyway, leave the base rate where it is, for the next ten years and put the BoE back under the Treasury; forget about monetary policy tools. Start teaching future politicians about fiscal policy tools and how they are responsible for it. Stop them delegating to Quangos like the BoE and the OBR.

  4. Posted July 11, 2016 at 5:41 am | Permalink

    The devaluation of Sterling seems well overdone. Yet were there to be currency wars in progress, we might congratulate the Bank on a success: as there are not, the Bank seems maladroit.

  5. Posted July 11, 2016 at 5:46 am | Permalink

    I agree with John. A further cut in interest rates would send a signal that the BOE thinks there is a crisis further exacerbating the City’s post Brexit hype. It will not make any difference to real world business or consumer investment decisions. It will have further negative effects on savers including pension schemes. I hope Carney takes a deep breath and does nothing!

    • Posted July 11, 2016 at 7:41 am | Permalink

      @Rupert Green; I’m old enough to remember a certain PM of the time (reportedly) saying “Crisis, what crisis?”, yes I know those were not his exact words but he did play down the looming crisis all the same, much to at least one opposition parties gain…

      I hope Mr Carney takes what action he feels necessary, not allowing himself to be pulled into internal party political tug of war.

      • Posted July 11, 2016 at 1:16 pm | Permalink

        Jerry

        Far too late for that Carney has been playing politics for quite some time now. Not really a surprise given his background

  6. Posted July 11, 2016 at 5:51 am | Permalink

    At this point they’ll cut rates simply because Carney has said they’ll be cut, if the markets stop believing his guidance he’s in trouble. As to whether he SHOULD cut rates I assume he wants to simply to validate all the scaremongering predictions he made before the referendum. I think the two leadership candidates should tell us who their Chancellor would be – why not ?

  7. Posted July 11, 2016 at 5:51 am | Permalink

    Also, Mr Carney seems to overlook the pro tem Chancellor’s assurance that interest rates would rise following Brexit. Surely the Chancellor was not indulging in another Project Fear manoeuvre? How much more must his credibility suffer before markets begin to worry that he remains able to influence policy?

    • Posted July 11, 2016 at 7:45 am | Permalink

      Osborne involved in project fear! Surely not he is as pure as the driven snow.

      Did quitter Cameron not also promise not to quit after the referendum.

      Can they not both be prosecuted for calling a referendum, yet failing to prepare for both outcomes which is clear negligence. Also for threatening the nation with higher taxes and interest rates if they dared to get the answer wrong and blatantly slanting the pitch for the referendum with tax payers money in any way they could. Nonsense threats & warnings from Carney and the likes?

  8. Posted July 11, 2016 at 5:55 am | Permalink

    I’m getting abit cheesed off reading nearly every day about remainers complaining about us leaving the eu
    http://www.theguardian.com/politics/2016/jul/11/brexit-parliament-should-make-ultimate-decision-on-whether-to-leave-eu-barristers-say
    Then there was yesterday
    https://www.google.co.uk/amp/www.dailymail.co.uk/news/article-3682742/amp/May-s-aide-hints-second-referendum-Former-Attorney-General-says-People-change-mind-not-writ-stone.html#
    These muppets must except what the majority of GB voted for or they will be very sorry if they try to ignore us,and stop trying every trick in the book to over turn a democratic vote

    • Posted July 11, 2016 at 7:34 am | Permalink

      Indeed the BBC is endlessly pushing this line too. We are not out of the EU yet the referendum was just a battle on the way. The next battle is to prevent T May and the remain/Libdem wing from keeping control of the Tory party.

      • Posted July 11, 2016 at 12:07 pm | Permalink

        It’s now officially a stitch up……

        zorro

      • Posted July 11, 2016 at 12:12 pm | Permalink

        It looks like we have lost that one now, unless Mrs May can reinvent herself as a proper Conservative.

    • Posted July 11, 2016 at 10:16 am | Permalink

      Also, we constantly hear that those who voted for Brexit were very old, or poorly educated, or both.

      • Posted July 12, 2016 at 11:31 am | Permalink

        Actually they are people who just like democracy and rightly fear socialist anti-democratic super states.

      • Posted July 12, 2016 at 4:12 pm | Permalink

        I doubt they were, but anyway they were right and in the majority. This despite all the propaganda from the government, the establishment, Labour, Libdims, The faux Tories, and the BBC. Much of it paid for by this majority of Brexit voting tax payers.

  9. Posted July 11, 2016 at 5:59 am | Permalink

    I agree John . I Rates will disappear up their own exhaust if we keep going on and we will have to pay to invest our own money. Already building societies are beginning to get the better of banks from small investors.

    Houses are maintaining their prices in the north

    Good interview this am . Everyone was singing from the same hymn sheet and although the mother/ politician diversion was mentioned it didn’t deflect from the main purpose to positively do more than survive Brexit , but to come out of it triumphantly.

  10. Posted July 11, 2016 at 6:01 am | Permalink

    Many of us wll agree with you Dr Redwood, but the BoE has been on a particular play book for nearly a decade, and one that Mr Carney seems particulalry confortable with. It is also one that some bperceive to benefit certain institutions and groups in the economy, it would be better for Mr Carney to hold fire.

    (In terms of removing unceratinty the Government needs to get a move on with leadership, a new Brexit cabinet and moving investment projects forward – show confidence and lead the way).

    • Posted July 11, 2016 at 8:43 am | Permalink

      I should have added as well as getting the new leadership in place much quicker than September (speed this up!), one can only hope the new cabinet will include a Chancellor that gives confidence. Without sorting out the leadership and cabinet more quickly the UK is left with a don’t care PM (absolutely unbelievable) a dubious Chancellor and the unelected Mr Carney to “steady” the markets.

      Mr Carney does not know how to normalise, having given guidance before about raising rates he and the MPC ignored it, taking the UK further into the ZIRP trap is not useful. Even the current Chancellor has indicated that the fiscal strategy is now different, the MPC need to make it clear that there will not be more loosening until things play out a little.

      In the future I would even question whether the BoE should remain independent and whether control needs to go back to a competent Chancellor.

  11. Posted July 11, 2016 at 6:06 am | Permalink

    JR, we understand why you may not feel able to call for Carney to go. We have nothing preventing us, so we called for this last week.

    Naturally it will have to be done in a way which doesn’t spook the markets, but we simply can’t have this man continuing to talk down our economy in order to justify all his politically-inspired pre-Referendum statements.

    Whilst writing, we have important and uplifting news this morning on the legality and constitutionality of invoking Article 50.

    Best wishes, the Facts4EU.org Team
    http://facts4eu.org/news.shtml

    • Posted July 11, 2016 at 8:04 am | Permalink

      Martin Howe and some colleagues say that:

      http://www.lawyersforbritain.org/brexit-referendum-binding.shtml

      but unfortunately 1000 other lawyers say differently:

      http://www.independent.co.uk/news/uk/politics/brexit-eu-referendum-result-not-legally-binding-lawyers-letter-a7129626.html

      I’d go along with Martin Howe, not so much on the basis of more complex legal arguments but for the relatively simple reason that I outlined below before reading your comment: I think it’s democratically unacceptable to argue that –

      “Parliamentarians who previously showed no interest at all in taking control of the issuance of an Article 50 notice, despite numerous opportunities to do so over the past eight years, in fact thirteen years if you take it back to when that “exit clause” first appeared in the EU Constitution, should perhaps now be allowed to claim control of it retrospectively, and then stop it.”

      However it’s down to judges to decide and I can only hope they agree.

      • Posted July 12, 2016 at 10:54 am | Permalink

        Well, I would have outlined it below if JR had published it …

  12. Posted July 11, 2016 at 6:52 am | Permalink

    Carney with the encouragement of the financially incontinent Cheshire Cat are doing all they can to fullfil their pre Brexit prophecy.
    It’s time Parliament clipped their wings and suspended both of them.
    The sooner Carney is on a plane to Canada the better.
    Interest rates should be increased half a percentage point to steady the pound.
    As Banks said if May gets in it will be UKIP on steroids next election. We don’t want some half baked fudge of name changing we want OUT.

  13. Posted July 11, 2016 at 7:14 am | Permalink

    Trying to control the currency is a fool’s errand. Mr Carney would be a fool to try. I doubt that he is a fool. But, as you say, he seems to be trying to influemce it. The problem is that he must serve several very different constituencies – the politicians who predicted doom and gloom if the country voted for Brexit (as he did himself), consumers who expect him to keep inflation down, foreign investors who expect their investments to be measured in a currency backed by sound money and exporters on whom we depend for foreign exchange earnings. For all of these sudden, unexpected fx changes can be very uncomfortable or bad news.

    The difficulty for the foreign investors and the exporters is making a judgment about the medium term outlook for the currency. For exporters it will influence how you position your product in overseas markets especially if the product requires significant investment and long development lead times to bring to market; jet engines (Rolls Royce) and automotive products (Jaguar Land Rover) are prime examples. A key question for them is whether the recent devaluation is likely to be sustained or merely a temporary blip. In the brave new world of Brexit the judgments made will have very significant implications for future investment and future job prospects.

  14. Posted July 11, 2016 at 7:27 am | Permalink

    I see Lord Dobbs in the Times has been comparing Theresa May to Margaret Thatcher (defiant tough fair and won’t be bullied he says). Well perhaps she is, but she is alas defiant mainly against the will of the UK voters and the party membership. She was defiant against leaving the EU. She even blatantly lied to the public a couple of weeks ago, about “having control of our borders through Schengen”. This to try to deceive them into a remain vote.

    She is yet another broken compass. A “BBC think”, absurdly PC, pro EU, tax borrow and waste, no nation Tory not that far form Harriet Harman in many ways. One who believes and in top down government, large government know best, higher taxes and central control of almost everything. She is the opposite of Thatcher in all that matters.

    She is a continuation of Osborne and Cameron. On balance probably even worse than quitter Cameron. At least he did not sound so bossy, tedious and patronising.

    Interesting to see that under Cameron’s leadership the parties membership fell from about 245,000 to 134,000. All surely due to a total lack of a working compass and vision, working against the members. Would May perhaps halve it again?

    The party needs a working compass as much as it needs a new leader. Leadsom is by far the best hope of getting this. May is just another broken compass, a John Major type who is almost as dreary, misguided, dishonest and tedious as he was.

    The country voted for a revolution, not more of the same under someone like Theresa May.

  15. Posted July 11, 2016 at 7:36 am | Permalink

    With official rates already so low it seems a bit pointless to shave off a fraction of a percent, one suspects the only purpose could be to help the pro-EU media continue their narrative that we made a bad mistake by voting to leave the EU and somehow that mistake has to be rectified. Parliamentarians who previously showed no interest at all in taking control of the issuance of an Article 50 notice, despite numerous opportunities to do so over the past eight years, in fact thirteen years if you take it back to when that “exit clause” first appeared in the EU Constitution, should perhaps now be allowed to claim control of it retrospectively, and then stop it. Or maybe we need a general election to muddy the waters.

    However I would say that if things did start to go badly wrong there is still the option of more QE, so far it stands at £375 billion but that could be increased.

    • Posted July 11, 2016 at 11:46 am | Permalink

      “still the option of more QE”

      Indeed legalised counterfeiting appears to work. Pity about the asset bubbles it causes because as all bubbles do when over inflated they burst.

    • Posted July 12, 2016 at 12:53 pm | Permalink

      Reducing interest rates would lead to a further depreciation of sterling. That would feed the Carney narrative.

  16. Posted July 11, 2016 at 7:51 am | Permalink

    A prime example of why central banks should not set interest rates or determine how much money is in circulation. You argue that interest rates should not be lowered Carney argues that it should. Both of you are experts who is right? I suspect you are. However if left to the markets it would be demand that would decide and then it would be 100% accurate and experts error which they are so prone to would be taken out of the equation.

  17. Posted July 11, 2016 at 8:18 am | Permalink

    I have nothing to say for a couple of weeks – sorry about that !

  18. Posted July 11, 2016 at 8:38 am | Permalink

    I am informed that the reason the sale by British Land went through is that there is expected to be a collapse in new construction in London following Brexit. Supply goes down. Demand (say) remains unchanged. The price goes up.

    • Posted July 11, 2016 at 10:49 am | Permalink

      Yultwaymartyn ,

      How does a collapse in new construction in London correspond to a reduction in supply ?

      Surely it is a case of supply increasing more slowly than expected .

      • Posted July 12, 2016 at 8:25 am | Permalink

        yes. correct. A reduction in the anticipated expansion of supply.

  19. Posted July 11, 2016 at 8:42 am | Permalink

    I agree that to cut interest rates will destroy the pound. This is what they have been doing for the last 8 years to “get the economy started”. It does not seem to have worked very well so why not try and put them up ? After all government borrowing rates are at an all time low now; what more do they want?
    I am going to rename the Governor “Clueless Carney”! Didn’t he destroy the Canadian economy first before coming here and trying to do the same in this country?

  20. Posted July 11, 2016 at 8:47 am | Permalink

    It is not clear that the Bank of England plans to take action to control the level of the Pound, but for other reasons.

  21. Posted July 11, 2016 at 10:11 am | Permalink

    The BOE is now a world institution with one of the world top banker in charge of it and at this time they see a world slow down so are taking action to stimulate the world economy with your money which ends up in their pockets.

    It will be going on all summer with the BOE, ECB, BOJ with the fed taking a back seat at this time, the one percent have cut back spending to enforce it.

    Brexit is just what they wanted but it would happened anyway, we are entering a melt up of global assets on the back of central bank largeness, we might be doing alright because we have more people coming into the country than anywhere else but rest are not, so they want to uses your money to stimulate world assets, the one percent will double their money on this one and fed will be in next year.
    I see the S&P 500 going to 2300 in the next few months with a top in 2018 of over 3000, you might ask why are they doing this, the answer might be because they can and there is nobody to stop them.
    Nobody look at companies book any more and there are more enron now than you can shake a stick at all a round the world,

    Do they know what they are doing, of cos not, they just see a opportunity and take it, most politician are behind it with the media spinning stories, they are pouring millions of people into western countries and increasing wages a little to keep it going so they can earn more money for longer.

    Yes they are hollowing out companies and worker pension funds, they want it all even your house now, The labour party with con party and the establishment with the elite see the labour leader as a threat to their standing and wealth along with the right of con party and will do all they can to stop them because 500 MPs in parliament are all on the same team, so it make no difference how you vote.

  22. Posted July 11, 2016 at 10:18 am | Permalink

    I can’t believe that people are equating rate cuts with Brexit. It may be a convenient narrative, but look around you, every single central bank in the world is cutting rates. They’re doing it because globally we are debt saturated and deflation is the only way that remains. Deflation is killing the banks, massive loan books are collapsing. This is a battle against the death of the financial status quo.

  23. Posted July 11, 2016 at 11:39 am | Permalink

    As I writ it leadsom pulls out of leadership, sinking the right wing of the con party, will the labour leader be able to hang on, last man standing, that leaves 40 PMs left in the HOC to defeat the rest have rolled over to the establishment and the elite, as for you don’t do it BOE it a forlorn hope, you have lost time to pack your bags and go.

  24. Posted July 11, 2016 at 11:56 am | Permalink

    We need to see the state of the real economy which has been masked by fake Interest Rates and QE. A rate cut now not only is unnecessary but also binds the hands of the BOE in responding to a future crisis. In fact rates should be trending upwards gradually to protect consumers from the rising cost of Imports. At least until we start to develop our Internal Market. If rates are cut its a sign of weakness and will spook the market.

  25. Posted July 11, 2016 at 12:00 pm | Permalink

    No need to worry brother I have it all in hand, the book was wrote many moons ago, I am just a bit slow that’s all, well all going to plan, the bigger they think they are the thicker they are, they never see me coming.

  26. Posted July 11, 2016 at 12:21 pm | Permalink

    Will you be joining the totalitarian Marxist in the HOC.

  27. Posted July 11, 2016 at 12:25 pm | Permalink

    Mr Redwood now you know who is going to be your new leader and our next PM, do you have any idea who will be the minister who will lead the Brexit negotiations

  28. Posted July 11, 2016 at 12:47 pm | Permalink

    The establishment and the elite put two fingers up to con party process, democracy, freedom and sovereignty, what next.

    • Posted July 11, 2016 at 4:08 pm | Permalink

      Paranoia rules!

    • Posted July 11, 2016 at 4:43 pm | Permalink

      Maybe the party that Peter Hitchens hinted at, comprised of the front-line Brexiteers, needs to come into existence. It has multi party support, and in excess of 17 million potential supporters, patiently waiting for for the UK to leave the EU. It would normally take decades to amass such political support and it’s all there ready for action. It has to be a no-brainer. Who will be brave enough to set the ball rolling?

    • Posted July 11, 2016 at 5:12 pm | Permalink

      Conservative MPs were elected 14 months ago, and represent their electorate, not the 150000 Conservative activists. So please stop talking about democracy, freedom and sovereignty. It is getting ridiculous, and I certainly don’t want the rule of the mob, certainly not that made of a few red-toothed (far-) right-wingers.

  29. Posted July 11, 2016 at 1:44 pm | Permalink

    The reason they picked the home office minster for PM is because she sleeps all day in her office and if anyone knock on the door she goes threw the roof, so they all know they can get away with anything they like because no one in is at the helm of the ship or in charge, its a free for all.

  30. Posted July 11, 2016 at 2:32 pm | Permalink

    The BoE will do what the Fed decides to do, before, during or just after the Fed announcement.
    Should the BoE stipple here and there in a dilettante manner befitting its “expert” modus operandi,- it will excite the junior section of market dabblers who seek momentary upticks and downturns on their chart analyses to make hyperbolic killings.

    Has Mr Carney come to the end, at last, of his contract with the BoE ?

  31. Posted July 11, 2016 at 5:05 pm | Permalink

    Please follow the argument where it leads. Osborne’s fiscal relaxation is disastrous. Carney’s monetary relexation is disastrous. So sack the pair of them. QED.

  32. Posted July 11, 2016 at 5:16 pm | Permalink

    NATO to extend out afghan war on back of the new con party leaders win, 4 years i hear.
    so it starts.
    more troops will be going.

  • 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.

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