The MPC should be changed, before it does any more damage.
In my New Year message at the end of 2007 I called again for lower interest rates. It was obvious that rates were too high, and they would bring many job losses and factory closures. Inflation would rise during 2008 owing to previous MPC mistakes, but would fall again in 2009.
As the MPC are intelligent economists, we must assume they could see that too. So why, now the magnitude of job losses and factory closures is becoming clearer, do they suddenly panic, and do what they should have done a year ago? Have they been pressurised by the government acting through the Bank of England?
I would normally welcome a major U turn by a group of powerful people who have got it wrong. However, on this occasion, they have missed another important change in the last few months. The government’s borrowing requirement has shot up from the £43 billion forecast in the Spring, to more than £120 billion.
The MPC should have written a letter to the Chancellor, saying that for inflation reasons they wanted to cut rates substantially, but they needed guidance on the likely size of the government deficit,given the impact this will have on the ability of the government to borrow enough money. They could have added, the more the government controls its deficit, the more they could cut interest rates.
We now have monetary policy at variance with fiscal policy. The Chancellor should take urgent action, to avoid the imbalance doing damage to his plans.
Just to show you how abnormal the economic world now is, a few hours after the large interest rate cut sterling is stronger and Uk share prices are down!