Most commentators expect the Bank’s Monetary Committee to admire their handiwork and recommend more of the same. They are likely to blunder on with cheap and easy money for the public sector, a shivering small and medium sized business sector denied credit at a sensible price, and a rotten deal for savers. They call this supporting the recovery, and skate over their considerable role in the inflationary boom and the credit squeeze slump that preceded it.
So what should they do to restore some private sector jobs, prosperity and balance to the UK economy? They should send a letter to the Chancellor telling him to make necessary changes so they can run an intelligent money policy that does support recovery. The letter should recommend:
1. The FSA relaxes cash and capital controls on banks lending to the UK private sector, so more money can be released for companies in the UK to expand jobs and investment.
2. The government should start immediately on a deficit reducing package of spending reductions to cut the government’s demands on credit markets.
If the FSA did what it needs to do, the Bank of England should at the same time start to unwind the £200 billion of quantitative easing, providing us with a target of how much money and credit it is happy to see in circulation. Unleashing bank lending without a phased withdrawal of the QE would be inflationary.
If the government does not start to cut the deficit the Bank should raise interest rates. The fall in sterling we are witnessing is inflationary. Delaying raising rates will lead to a worse problem later, and to higher rates later. Once again this MPC seems to want to live in denial, and will end up doing too much too late as it has done over the last five years of this monetary crisis. The current Bank rate bears no relationship to the structure of rates being paid by business, or even by the government itself for anything other than very short term money. It is time for a reality check. If the MPC doeds not seek to get back in charge, it will continue to be made irrelevant by the markets who have a very different view of the success of UK policy to that of the government and its MPC.