The government experiment with a so-called independent Policy Committee of the Bank of England has been a disaster, made worse by the way the Establishment has made it a matter principle to genuflect to its success at a time of unprecedented economic instabiliy, made worse by its actions.
Readers of this site will remember how strongly I urged them to cut rates year ago to avoid deep recession. They resolutely looked in the rear view mirrow at the inflation that had already created by low rates in 2005-6, and refused to see the damage they would do in 2008-9 with the high rates that would bring the private sector borrowing binge to a screaming halt. In the good times they ignored the asset bubble in property and private equity. Then as the bad times began they ignored the damage they were doing to the inflated asset prices.
Today they are once again looking backwards and getting it hopelessly wrong. They are ignoring the bond bubble and the government borrowing explosion. They assume the banks will stay broken by setting very low rates. They should beware. Rates should not be cut any more. Indeed, the last cut was a cut too far. We need more savings and loan repayments in this country to create stability. Savers need a reward for saving. Above all the MPC charged with watching inflation should understand the impact of the very large devaluation of sterling they have encouraged.
Imported goods will be 25% dearer in 2009 they were for much of 2008. The sharp slide in sterling was concentrated in the second half of 2008, and got worse as the year neared its end. These higher prices for importers will at some point have be passed on, meaning we buy fewer goods, more retailers go bust, and the price level will reflect the currency changes to some extent. With sterling this weak keeping rates elow Euroland and hinting they are going to fall to near zero is economic suicide. The MPC should be ashamed of itself to be so blase about this worrying development.
The government and Bank decided sometime ago they needed to cut our living standards by the interest rate and banking policies they followed. Now they have decided that much of the hit on our living standards will come from a huge fall in sterling, increasing the prices of the many items that we traditionally import, and limiting the favourable impact of falling commodity prices on the UK economy and incomes.