Comment: MPC should take a lead from the US
Nov 3 2008 by Kevin Rowan for The Journal
I CAN’T easily remember a time when the economic and fiscal environment seemed to be acting as quickly and with as much volatility.
No sooner are we talking about the severely damaging impact of inflation on the economy, not to mention what that has meant to workers receiving below inflation pay rises, than we are discussing the fragility of an over-borrowing financial system.
Although those other pressures haven’t totally disappeared, the focus is on the impending recession and the dramatic consequences on jobs and businesses throughout the UK.
The downturn is already hurting. People are being made redundant, thousands of families a day are losing their houses and businesses are falling at a worrying rate.
The Prime Minister has assured us that he and his government are working full time on this economic challenge, regional agencies have responded quickly and major support is being directed to employers under pressure and workers experiencing redundancy.
There is also evidence to show inflation has not only peaked, but is on its way back down. In the early part of this year, when the squeeze was being put upon public sector workers, the TUC made it clear (as did the Bank of England) that it was fuel and food costs that were driving up inflation.
Anyone who has filled up their car or bought a basket of shopping in the last few weeks will have noticed the difference to a month or two ago. The inflationary pressures from these sources has subsided.
Due to swift, decisive and effective action by the Government the UK banking system appears to be more stable, if only for now, a move replicated in the US and elsewhere, inferring some optimism that the fiscal society might be managed out of the recent crises that some were predicting as “the end of capitalism”.
This leaves the recession to tackle and the spotlight is on the Bank of England Monetary Policy meeting this week. With its focus on meeting inflationary targets, the MPC has been slow to reduce interest rates.
David Blanchflower has been a lone voice seeking rate cuts, arguing that underlying weakness in the economy needs to be tackled sooner rather than later.
The stock market and banking crises have proved Blanchflower right. Inflation hasn’t gone away, but it is no longer the main challenge.
High inflation hurts businesses and individuals, but recession hurts much more. The MPC must take a lead from the US and make a major cut in rates this week.
