Interest Rates: A Change of View

The general view is that interest rates should stay on hold a while longer. This blog has supported those who think a small rise is overdue. Especially we disagree with the economists and politicians who want to slow the cuts as well as  to hold interest rates down. However there is a case emerging for keeping them down now. 

Commodity and tax inflation has not fed through into wage and salary inflation, thus disposable incomes are shrinking. This is holding down house prices, which is a long term must, as well as preventing indiscriminate price rises. All of that bears down on the kind of inflation within the remit of the Bank of England to control. Additionally, this is important for one of the world’s most indebted nations, household debt and mortgage debt is coming down. In part this is because many borrowers have left their monthly payments at the old level, thus paying off more capital, while paying less interest.

There is another factor. This recovery has to be manufacturing and export driven. Indications are that it is, but only to a point. The impact of cuts both on jobs and spending is likely to be nearer the pessimists’ fears than the optimists’ hopes. All the more is it necessary for the private sector to take up the slack. This is easier with a low pound. A hike in interest rates will increase the value of sterling. Above all, we do not want that now.

Had rates been increased by a quarter or half point months back when inflation began to take off, it may, likely would, have been possible to drop them back again now, giving a sharp  boost to industry and business just at the moment when an extra heave is needed. That opportunity was passed over. Now may not be the time to try to catch up. If damage has been done in the battle against inflation by being too slow, to act now after the economic balance has shifted would be  to be wrong again. There is enough resilience in the economy to be wrong once; twice over would be another matter.