When the MPC meets this week it should remember just how dependent we are on imports, and just how far sterling has dropped in the last couple of months. If we take the fifth or so of our National Output represented by imported goods, and reckon that the prices of those goods will over the next few months rise by around one quarter as the full impact of lower sterling comes through, we can see there is an inflationary factor the MPC must take into account.
The MPC will douibless take into account Mr Darling’s apparent second thoughts on how long the recession will last. When the Chancellor produced his revised forecasts in the Pre Budget Statement, many of us queried his optimism that the recession would be relatively shallow and short lived, with an upturn commencing in July 2009. I read now that he thinks this may after all have been a tad optimstic. Unfortunately we are well past the point where a further cut in interest rates can miraculously turn the economy round this summer.
I have set out in the FT why I advise the Monetary Policy Committee to keep interest rates where they are this week. In summary, the problem is no longer the price of credit the Bank of England is recommending, but the availability of credit. Business groups and others lining up to urge a new cut, should ask themselves is it the base rate that still causes them anguish, or the scarcity of credit, or the failure of the banks to charge them a similar rate to base rate?
On reflection many business people might see it is the latter two issues that cause them most current concern.
If, as many of us fear, this is not a normal cycle, the action needed relates to the health of the banks rather than the level of base rate. I set out in the article how even lower interest rates could make restoring the banks even more difficult a task.
If the MPC does cut rates more, this does not mean that suddenly all lending rates will fall by the same amount as the MPC cut. It will mean the banks have to create a different structure of lending and deposit rates so they can still do some business and make some money.
Far from establishing the MPC’s wisdom and authority, a further cut would be evidence that it has lost the plot. It would mean a world where base rate was less important than the market rates banks have to set.
It would be a further bad blow to savers, at a time when we need more savings to correct private sector balance sheets. This crisis began when governments called time on too much private sector borrowing. It will not end through governments becoming the borrower of last resort themselves, but when banks, companies and private individuals have stronger balance sheets that can sustain new activity.