'Zombie Companies Are Kept Alive by Artificially Low Rates' LEADING ECONOMISTS CALL FOR RISE IN INTEREST RATES

Western Mail (Cardiff, Wales), February 6, 2013 | Go to article overview

'Zombie Companies Are Kept Alive by Artificially Low Rates' LEADING ECONOMISTS CALL FOR RISE IN INTEREST RATES


Byline: RHODRI EVANS Assistant Business Editor rhodri.evans@walesonline.co.uk

A PANEL of leading economists has argued that interest rates should be raised tomorrow, amid concerns that artificially low rates are keeping 'zombie' companies alive.

The Bank of England's Monetary Policy Committee is meeting today ahead of its rates announcement tomorrow.

But the Shadow MPC, which includes Cardiff Business School economists professors Patrick Minford and Akos Valentinyi among its members, voted by six to three in favour of a 0.25% rise in interest rates this month.

Members of the Shadow MPC, which is drawn together by the Institute of Economic Affairs think tank, raised concerns that a high level of Government intervention in the economy is causing capital to be wrongly allocated.

A majority on the Shadow MPC accepted the analysis put forward by Andrew Lilico of Europe Economics that the low level of interest rates meant that banks were providing ongoing credit to 'zombie' companies - those that are able to pay the interest on their debts, but not pay down the capital - because they feared that 'pulling the plug' would lead to write-offs damaging their balance sheets.

They expressed concern that while these existing borrowers are being given low rates, companies seeking new loans are only able to obtain them at relatively high interest rates and on stringent conditions.

Due to exceptionally low UK interest rates for such a long period of time, Shadow MPC members were concerned that credit was not being efficiently allocated, and was acting as a hindrance to recovery.

There are thought to be a significant number of such 'zombie' companies in the UK. A recent report by Deloitte claimed that as many as one in 10 UK firms could be classed as 'zombies'.

Cardiff's Professor Valentinyi was among the Shadow MPC members who backed a rise in the base rate this month.

He warned that monetary policy had run its course and keeping interest rates at the current level worsened the mis-allocation of capital.

Cardiff University's Professor Minford advocated a sharper rise to 1%, saying it is time to signal that monetary policy cannot be used indefinitely to stimulate growth.

At the meeting he also voiced concern at the incoming Bank of England governor, Mark Carney's suggestion that more QE would be deployed and that the inflation target would be abandoned.

But there were three leading economists on the Shadow MPC who voted against a rise.

Among them was Lloyds Bank economist Trevor Williams, who warned that a rise in the Bank rate this month would be 'a disaster'. …

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