David Blanchflower: What took central banks so long to do more stimulus?

Why didn't they lower rates in February given there was no risk of inflation?

As I boarded a flight, which has wifi, to Seattle for a friend's daughter's wedding, news came through that the People's Bank of China had cut rates, for the second time in a month, by 0.31 per cent. Interesting number. I can't say I ever thought of voting for anything that was not divisible by 25 when I was on the Bank of England's Monetary Policy Committee, but why not? External MPC member Willem Buiter, much to the market's surprise, voted for a rate cut of 40 basis points in May 1999 for some reason. Then the unsurprising news came in that the MPC had increased its asset purchase programme, by £50bn. Finally, just as the plane was about to leave, the announcement came through that the ECB had at long last finally cut rates by 0.25 per cent to a record low of 0.75 per cent, though still well above the rates in the US and the UK.

Three central banks easing monetary policy together does suggest that the global economy is slowing once again and we should take note. I have every expectation the Federal Reserve will also act soon if the employment data continues to worsen, as it did on Friday when non-farm payroll growth continued to disappoint.

The ECB decision is the most astonishing. And not because they did it, but because it took them so long. Why didn't they lower rates in June, May, April, March, February, etc, given that there has been no risk of inflation for the last five years? Presumably the fact that euro area unemployment this week hit 11.1 per cent with youth unemployment at 22.6 per cent was a bit of a wake-up call. Spain is about to enact a further €30bn of fiscal tightening, including spending cuts and increases in VAT, in order to reduce the deficit, despite the fact that it will inevitably increase it further. Up is down; the lunatics have taken over the asylum.

At the press conference, the ECB's president, Mario Draghi, said: "Economic growth continues to remain weak with heightened uncertainty weighing on confidence." He added that: "The risks surrounding the economic outlook for the euro area continue to be on the downside". Eurozone growth has been killed off by overly tight monetary and fiscal policy, and very little has changed for a long time. Raising rates, twice, in 2011 was an act of economic suicide, just as it was in 2008 when the euro area economy was collapsing.

And so to the MPC, which restarted its programme of quantitative easing, something it obviously should have done in both May and June, and probably earlier. There was an inevitability about it given Sir Mervyn King's apocalyptic language over the last week or so on the parlous state of the UK economy. Sir Mervyn, of course, was in the minority of four out of nine at the previous meeting voting for more stimulus. This couldn't go on for long if he was to retain what little of his credibility he has left, so he was inevitably going to put pressure on his minions to remove this embarrassment.

The MPC's central forecast for inflation in its May Inflation Report suggested inflation would be below its 2 per cent target, so it should have acted then. Once again the MPC has been caught with its pants down; monetary policy tends to work best when it is proactive rather than reactive.

The MPC is coming under increasing pressure to broaden the range of assets it purchases given that the economy still seems to be slowing and credit availability remains limited, especially to SMEs. It remains unclear why it hasn't, as advocated by Adam Posen. In his letter to the committee agreeing to increase the ceiling, the Chancellor, George Osborne, made it clear eligible assets include not only gilts but also private-sector assets, for which a £10bn facility remains on the books.

The MPC's May growth forecast for 2012 still looks overly optimistic at 1 per cent. Capital Economics still believes that growth will be minus 0.5 per cent, and I agree with them. In part this is because provisional figures reporting that household spending rose by 0.1 per cent quarter on quarter in the first three months of this year were recently revised down and spending is now estimated to have dropped by 0.1 per cent. There is every expectation, based on business surveys and low levels of consumer confidence, that second quarter growth will also be negative, making three quarters of negative growth in a row.

And then to that inquiry that the Chancellor had hoped would be solely focused on the manipulation of Libor and be headed by Andrew Tyrie, who insisted it had to have cross-party support. Mr Osborne seems to have badly underestimated the public mood and left the suspicion the Tories have something to hide. During the Commons debate, the shadow Chancellor Ed Balls demanded Mr Osborne "put up or shut up" over an allegation in a magazine interview, where the Chancellor said Labour was "clearly involved" in manipulating the interbank lending rate four years earlier. Slasher, as ever, failed to deliver. What a mess. The incompetent Mr Osborne has to go for the good of the country.

Start your day with The Independent, sign up for daily news emails
News
Ben Little, right, is a Labour supporter while Jonathan Rogers supports the Green Party
general election 2015
News
The 91st Hakone Ekiden Qualifier at Showa Kinen Park, Tokyo, 2014
news
Life and Style
Former helicopter pilot Major Tim Peake will become the first UK astronaut in space for over 20 years
food + drinkNothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
News
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
Sport
Alexis Sanchez celebrates scoring a second for Arsenal against Reading
football
Life and Style
health
Voices
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
News
i100
News
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
news
Life and Style
Buyers of secondhand cars are searching out shades last seen in cop show ‘The Sweeney’
motoringFlares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own