Mr Darling and the MPC need to think again

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.


  1. Stuart Fairney
    January 7, 2009

    The MPC really do seem to be a bunch of people sat in a room having a very interesting theoretical discussion which has little bearing on reality or LIBOR. And let’s be honest, if we were paying them on results…

    I wonder if there is a point anymore in central authorities trying to determine rates by decree, why not simply let the chips fall where they may?

  2. Brian Tomkinson
    January 7, 2009

    Who is actually making the decisions regarding interest rates, the MPC or Brown/Darling? Less than two months ago, much to the astonishment of the most people, Darling announced that this was going to be a severe recession but would have ended by the middle of this year! He now is saying, what he must have known then, that this was too optimistic. Clearly he is playing party politics with the country’s economy. The MPC reduced interest rates by unprecedented amounts and before the effects have had time to work through decided to cut them even more, seemingly regardless of the consequences for sterling and subsequent inflation and the deleterious effect on savers. It seems clear to me that Bank of England independence, if it ever existed, is well and truly over.

    1. adam
      January 7, 2009


    2. Baldin
      January 7, 2009


  3. John
    January 7, 2009

    I welcome this Road to Damascus conversion – I hope it’s because you’ve realised the stupidity of cutting interest rates in the face of a crisis caused by too little saving, but I worry it might just be that David Cameron has sat on you in order to shore up his attempts to court the pensioner vote 🙂

    Reply: It’s not a conversion, and No I have not been asked to change my view by DC or GO. When I called for lower rates they would have helped stave off recession. Today, at these levels, they will not help.

    1. John
      January 7, 2009

      Oh well jolly good then, more rejoicing in heaven over one sinner who is saved, and all that. If we had cut them more when you called for it, would you be calling for them to go back up now? I’d probably support that – if we’re going to print more money, or at least put more in the economy through government borrowing, that has to be done in a way that takes debt off the private sector and individuals, not a way that encourages them to increase their indebtedness too.

      Reply: I called for them to halve them. Now they have more than halved them so I call for them to stop.

  4. Blank Xavier
    January 7, 2009

    Why *does* the State set the base rate?

    Isn’t this gross interference in the market?

    We let exchange rates find their own level.

    We all know what happens when the Government tries to control exchange rates; the market has them for breakfast.

    Why don’t we let interest rates find their own level?

    We appear to be in the process of finding out what happens when the State tries to control interest rates.

  5. rugfish
    January 7, 2009

    Availability of credit is certainly one concern for businesses, but what about the main factor of demand ?

    If people lack confidence and want to horde their cash, then surely businesses will continue to lack the vim they need to get going.

    Why on earth does the government not see a direct correlation exists between confidence – available finance coupled with lower taxes – and the resultant jobs they could preserve and even create, by getting a grip on these things. Plainly even a child could tell them that without demand there will be no sale and no need to hire staff to either make or sell them.

    Are they just thick or are they purposefully wanting to break the country?

  6. Lola
    January 7, 2009

    “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.”

    That’s a very interesting statement. Does it imply that the state has no business in setting market rates of interest? That state rate, is purley the lender of last resort rate? Furthermore does it imply a decoupling between what rate the state would have to pay for money as to what it will charge to lend it? That is, what rate will investors demand from the UK to hold it’s sovereign debt?

  7. Colin
    January 7, 2009

    In addition to the lack of credit in the business arena, one of the biggest issues facing our economy and the population at large is the sheer, massive scale of unsecured personal debt. Over the past decade people have been able to manage their personal debt by re-mortgaging and paying off credit cards (before starting the cycle all over again), or in many cases, just continuing to borrow more and more, in the hope that the music would never stop. This personal debt mountain is the elephant in the UK’s living room. I’m sure we all want to do our duty and spend, spend, spend to save the economy. I’m not so sure that sufficient numbers of us have the means to do so any more.

    Is the government or anyone else for that matter is taking steps to address or mitigate this problem? Is it even seen as a problem? I note that local authorities have now taken to bankrupting people who can’t pay their council tax…

  8. adam
    January 7, 2009

    No need that i can see to cut interest rates further.

  9. Sarah H
    January 7, 2009

    I am sure that Mr Darling is not having second thoughts on how deep the recession was going to be. This was yet another damage limitation exercise. Why has Brown aged tso much in the last few months and indeed, just before Christmas looked positively ill. Is this because the strain of witholding the truth from us all is taking its toll? I imagine Lord Mandelson is behind all the damage limitation – its what he’s good at.

    Someone should be shouting the question WHY were interest rates held high for so long following the collapse of Northern Rock?

  10. mikestallard
    January 7, 2009

    You are so right! Isn’t the problem that the banks are hamstrung by Basel I and Basel II and an unspecified amount of laundered sub prime mortgage and bad debt? Banks have nothing to lend legally therefore.
    The general public are in hock up to our necks – mortgages, cars, furniture, credit cards, overdrafts – and we are taxed, according to one letter today in the Telegraph up to an eye watering 47.5% of our incomes.
    You are so right: lowering the rate isn’t going to solve any of this.
    What is that procedure called when you borrow from a person at a low rate and then lend the same money at a higher rate to someone else?
    I reckon that is financiers would do if the rate falls any lower: take the money out of the country and invest it safely somewhere else at a decent rate.

  11. Adam
    January 7, 2009

    Totally agree with everything you said. I guess one of the issues is that the government themselves are borrowing so much that real economy interest rates cannot fall, or credit be made available to the private sector.

  12. Matthew Reynolds
    January 7, 2009

    I would add £22 billion to the budget deficit in 2009-10 by giving all basic rate taxpayers a £1,000 cheque as of January. I would pass legislation to reform financial regulation. All the old rules that have failed should go and instead smarter regulation is needed to prevent the chronic abuses that caused this mess while ensuring that Banks can lend more freely. We should examine closely how the Americans are doing this and learn those lessons. The FSA should be ended so that the system is less complex with the Bank of England regaining its old powers that it used to such good effect prior to 1997. MPC members should serve seven year fixed , non-renewable terms subject to vetting by the Treasury Select Committee and approval by the House of Lords. Their inflation target should be the more accurate RPI-x and be a two year one of 2%. The aim would be greater financial stability with no more excess debt bubbles , no more bank runs , stable inflation and the Bank of England empowered to inject more liquidity as & when needed into the financial system.

    The extra £22 billion stimulus would protect the retail sector & reduce the number of people going broke by giving 22 million people more scope to repay debts while spending a bit more money. The failed VAT cut should end with basic rate tax cut by 3p to 17p instead. That would add money to all taxpayers pay packets thus helping to achieve what my £1,000 cheque for basic rate payers should do.

    As the Tax Payers Alliance has proved that £100 billion p/a of public sector spending is not needed one could talk to The Center For Policy Studies & Adam Smith Institute about what reforms could stop this happening within say six years. This would release monies for defense & balancing the budget.Unlike the VAT cut the basic rate reduction would be permanent and cuts in public spending would stop it being a net addition to the budget deficit over & above present levels from 2010-11 onwards. Major reductions in the PSBR should obviate the need for higher NI & Labours tax hikes on top rate payers – both will compound the damage done by Brown’s anti-enterprise tax system. George Osborne is right on NI and Dominic Grieve is right on cutting taxes for the wealthy. A bigger defense budget would make sense as the under-funding is doing so much harm that it defies belief.

    Britain can get out of this mess – common-sense prevailing that is! A short -term rise in public debt to counter deflation is fine as long as you can reassure the markets & boost confidence with a pro-stability plan to balance the budget.

    January 7, 2009

    In the same way we cannot forget that it was the Conservatives under IDS – not Labour backbenchers – who sealed the disastrous vote to invade Iraq, neither do we readily forgive DC & GO for exerting political pressure on Brown & Darling – at the height of their dither days – to rush into the re-appointment of Mervyn King. He was already on ‘extended probation’ for the initial Northern Rock collapse and since has seemingly lost the plot entirely. We have not heard why King and most of his committee chose to ignore Mr Blanchflower’s urging month after month.

    Personally it’s in our group’s personal interests to see a further cut in interest rate but already we are paying less than 3% on our BTL trackers; with no reduction in rental income the profits are now generous to say the least. However, objectively we agree that a further cut will have little or no positive effect.

    Individually we are also being bombarded with 0% balance transfer promotional offers and unsolicited increases in our credit limits by several credit card companies. Is this merely reward for maintaining excellent credit records over the years, or an indication that lending is not as tight as we are led to believe?

    On a different note Conservative Home’s blog yesterday on the projected Cameron reshuffle was reassuring in that the Conservatives have several ‘Big Beasts’ on hand to add their experience – inc Clarke, Davis, Redwood, Rifkind – as well as ‘Beasts in the making’ like Brady, Hands, Crabb and Mercer.
    Compare this talent, and their experience of the real world beyond Westminster, with the ‘no-hopers’ in the Labour cabinet and their really is a story to be told of the potent blend of old and new if we are bold and take the spotlight off the leader while he pauses for breath!

    1. Ian Jones
      January 8, 2009

      Hmmm, BTL. The very definition of Government causing market failure! The law preventing the adequate supply of new houses (Planning laws) whilst allowing free market demand via under taxed investments in housing!

      We wonder why the young feel so disenfranchised, I doubt the Conservatives can do anything as I expect the BTL crowd are a key constituent.

  14. APL
    January 8, 2009

    JR: “Mr Darling and the MPC need to think again”

    Yes, they do. Look what has just happened to German bond offer. (behind subscription),Authorised=false.html?

    1. Colin
      January 8, 2009

      No need to worry. In the land of Mugabenomics the BOE will just buy it’s own debt.

    January 9, 2009

    Ian Jones Reply:
    January 8th, 2009 at 8:41 am

    Hmmm, BTL.


    Hi Ian – it’s painful being pilloried, even gently!

    As a group of ex-marketing blokes we got into BTL through a couple of sons in 2000, and decided to offer fairly-priced, well-furnished and maintained property in good locations to rising young professionals. Also to treat our tenants as clients. We’ve never had a vacancy in our several flats since! Good, honest, sensible business..well rewarded.

    The point we make is that those extended period of low rates enabled us to do this and make a contribution to young people’s wellbeing, albeit at a fair personal profit – so it wasn’t all bad! Today’s further (in our view unnecessary) cut is yet more good financial news for those of us on trackers but, like other mortgagees, we suffered when rates quickly rose 5 times in 06/07 and rents remained constant.

    Putting personal interests aside we cannot see why interest rates should not be set for the 12 months ahead to enable would-be buyers – particularly 1st timers – to plan with confidence. Politicians and central bankers seem not to understand the havoc they wreak on ordinary folks’ budgets when they make such drastic changes of direction over a short period. If the direction had been changed here and in the US (13 rises over 18 months wasn’t it?) gradually and not suddenly (don’t they ALL rather enjoy donning the hairshirt and making the pips squeak!) we may well have avoided the complete mess in which the housing market finds itself – and housing and construction is the driving consumer force in both countries.

  16. […] John Redwood (the Tory MP) wrote this two days ago: […] the problem is no longer the price of credit the Bank of England is […]

  17. k jackosn
    January 10, 2009

    Messing about with interest rates will make little difference to bank lending. Why would a bank lend on a deflating assets. Now that the housing bubble has burst it will be impossible to re-inflate and house prices could end up 50% less than at their peak. Also businesses (estate agents and removal men spring to mind) which were profitable when we spent and spent may no longer be viable because of lack of customers. We need to face the truth, as record number of people going bankrupt and insolvent over the last three years show, THE PARTY IS OVER, NOW THE HANGOVER BEGINS!

Comments are closed.