The Bank of England shouldn’t try to stave off recession
6 November 2008
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The 1.5% interest rate cut came as a bit of a surprise to most people. However, we are in new territory and it is territory with which those economists who love their macroeconomic forecasting models will be uncomfortable. We have a constipated interbank market; bank lending and the monetary aggregates are probably falling rapidly (though the figures are very difficult to interpret); and the financial system is dreadfully short of capital. You cannot simply put an interest rate cut through an econometric model and see what the forecast is for the impact on inflation and growth (if you ever can do that). We are in the realm of intuition and judgement here. Should it have been 1.25% or 1.75%? Who knows? The important thing now is to monitor the effect.
The proof of the pudding will be whether the rate cut keeps bank lending and the money supply at reasonable levels. If banks are still under so much pressure that lending keeps falling and if the consumer is under so much pressure that there is no appetite to borrow, then the time may come when the Bank of England will have to think of using other tools to manage monetary policy. Interest rates may not be enough. Having said that, we should leave it to the Bank of England to manage the situation – under no circumstances should the government pursue a policy of deliberately increasing government spending to stave off a recession.
Indeed, I have been asked today whether the Bank of England has done enough to keep away recession and whether consumer confidence will recover. In fact, the Bank should not try to avert recession and it is probably not good if consumer confidence recovers too much either. As a result of the Bank’s past mistakes – and the mistakes of households too – a recession is inevitable. If we try to postpone a recession there will just be worse to come. Furthermore, households must rebuild their balance sheets and rein in spending after recent profligacies. The good news is that, if there is a permanent decline in consumer spending relative to incomes, there could be lower interest rates for a long time to come: this is tough if you are a saver though.
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It’s crucial, too, to find ways to encourage savings, and confidence in equities as a key basis for this. Especially if we are to move away from home-ownership as a ‘private bank’, and towards a decent rental sector, notably for lower income groups. The BofE must support a savings structure, to pay for health-care, too, and for long-term elderly care. Come on Eddie!
It’s crucial, too, to find ways to encourage savings, and confidence in equities as a key basis for this. Especially if we are to move away from home-ownership as a ‘private bank’, and towards a decent rental sector, notably for lower income groups. The BofE must support a savings structure, to pay for health-care, too, and for long-term elderly care. Come on Eddie!
“The Bank of England shouldn’t try to stave off recession?”
Really?
Is there any good reason why men and productive plant should persistently lie idle when they should be working and providing for their families, just because there’s a shortage of money?
To say that we can’t “afford” to keep them in work is like saying we can’t build any roads because there’s a shortage of kilometres!
“The Bank of England shouldn’t try to stave off recession?”
Really?
Is there any good reason why men and productive plant should persistently lie idle when they should be working and providing for their families, just because there’s a shortage of money?
To say that we can’t “afford” to keep them in work is like saying we can’t build any roads because there’s a shortage of kilometres!
There is no recession at the Global Reserve Bank. http://www.grb.net
There is no recession at the Global Reserve Bank. http://www.grb.net