Worldwide inflation is quite rapid. Food prices have been especially lively in recent months. China has hoisted interest rates to 5.81%, Brazil to 10.75% and India 6.25%. Australia and Canada too have started to increase theirs. In the UK mortgage rates and lending rates to small business are nothing like the official 0.56% base rate. Mortgage rates have been going up recently. Only the Bank of England keeps on driving by looking in the rear view mirror. It remains more worried by the past recession than the looming inflation.
Yesterday the Chancellor advised the EU to get its house in order by stress testing banks more strenuously and doing more to deal with the problems of Euroland. He said “The affirmation of the UK’s triple A credit rating and the fall in market interest rates shows that it is possible to earn credibility with a convincing deficit reduction plan.”
He is right to remind us that the UK’s top credit status was at risk on the previous policy. Lenders have taken some heart from the goverment’s expressed intention to cut the rate of increase in borrowing. However, his comments on the movement of interest rates are now a little dated. The 3.4% yield on ten year government bonds at the time of the budget did fall below 3% at its best. Today the rate has gone back up to 3.57%. There has been a general shift up in EU government bond rates, including Germany’s, as a result of the Euro crisis of late autumn. Some modest contamination did rub off on the UK, despite our non membership of the Euro.
It makes it more important than ever that the UK should decline any future involvement in financial bail outs and show it can now earn a dividend from staying outside the Euro. Meanwhile, we await decisive leadership from France and Germany from within the Euro area, as they move to sort out the problems of their currency. Chancellor Kohl always saw political union as an important complement to monetary union. The present German government both wants there to be more discipline over the other member states, and for the union to remain a union of independent countries where each one takes responsibility alone for its own budget and borrowing.
Senior Germans do not like the idea of bigger transfer payments around the union to allow the rich and successful to help the poorer and less enterprising. They do not want to pool their sovereignty over budgetary matters. They do, however, wish to impose substantial controls over the budget freedom of other states. This could prove to be a sticking point when it comes to hammering out practical proposals to put a sovereign behind the currency.