Cut Interest Rates Now; with Rising Levels of Personal Bankruptcy and Growing Unemployment, This Week's Meeting of the Monetary Policy Committee Has a Real Opportunity to Give the Economy a Much-Needed Boost

The Evening Standard (London, England), February 6, 2006 | Go to article overview

Cut Interest Rates Now; with Rising Levels of Personal Bankruptcy and Growing Unemployment, This Week's Meeting of the Monetary Policy Committee Has a Real Opportunity to Give the Economy a Much-Needed Boost


Byline: ANTHONY HILTON

ONE OF the jokes doing the rounds just now is about a person with only six months to live, who is advised in the time left to marry an economist.

The person will still only have six months - but it will seem like a lifetime.

On that basis the meetings of the seven-strong Monetary Policy Committee, who assemble again on Wednesday for their two-day session on interest rates and inflation, can be pretty heavy going. Not this month though. Often the decisions make themselves because there is no dispute about the health of the economy - but this week's meeting promises to open up a real debate.

There is already a fissure between those like Stephen Nickell who are insistent that rates should be cut, and others including the Bank of England Governor, Mervyn King, who believe they should stay the same or go up a notch.

Those inside and outside the committee who side with Nickell think that the rising level of personal bankruptcies, the soggy level of retail sales in the weeks since Christmas, and the growth in unemployment suggest that the economy needs a boost before it sinks seriously lower.

If the committee sits on its hands then the housing market will continue to stagnate, retail sales will stay low and more and more stores will go bankrupt. The net effect will be a large rise in joblessness, a collapse of consumer confidence and, if the air of doom and gloom becomes entrenched, a serious economic slowdown.

The other camp accepts that last year was pretty bad in summer and autumn.

However, they believe there was an unexpected turnaround in the final quarter of last year - helped in no small part by the last cut in rates - and if the economy is already on the turn there is no need to give it a further shove.

Indeed, to do so could be a bad mistake. It could stoke things up too much and damage the credibility of the committee by forcing it to reverse itself a month or two later by moving rates in the other direction.

Amid all this debate about how strongly the economy is growing, if it is growing at all, it seems churlish to point out that growth is supposed to be the Chancellor Gordon Brown's responsibility. It is only the rate of inflation which is the committee's problem. If it delivers stability in the inflation rate, it provides the foundation for polices which will deliver growth.

That is the theory. It comes with two problems. First, the MPC cannot take a view on where inflation will be in the months to come without having a pretty clear view about what is going to happen to economic growth, as one usually drives the other. If the economy is going flat out - at a rate higher than it can sustain - then shortages occur and people start bidding up prices. This causes inflation. …

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