Outlook: Be realistic: rates can't come down yet
Friday 10 April 1998
This scepticism about economic forecasts is more than shared by those running businesses or working in manufacturing. Executives and unionists alike just do not believe that the Bank of England's eight-person MPC has got a grip on how bad it is out there in the real world. The R-word has become common currency, at least in manufacturing. In industry, the recessions of the early 1980s and early 1990s are still a raw memory for many. In manufacturing, the future looks far bleaker than the slightly too soft a landing for the economy still being predicted within the Bank of England.
So no sooner did the Bank deliver what its critics wanted yesterday, by not raising interest rates, than they moved on to demanding an announcement that the next move in rates would be downwards. The unfortunate truth is that reductions are at least several months away, and an increase can not yet be ruled out. The MPC is split between one group wanting to raise rates and one wanting to wait and see. All are looking for signs of the economy slowing before they will start thinking about boosting it again by reducing borrowing costs. The evidence is not decisive enough yet, however much anguish the strong pound is causing some sections of business.
Even less realistic is the idea that a quarter or half point reduction in interest rates will bring the pound back down to earth. There is no magic link between interest rates and the exchange rate; a quarter per cent off one will not translate automatically into a certain percentage off the other. If on the other hand the MPC decided to lop a full point off base rates, putting more money into home-buyers' pockets and encouraging people to borrow, it would pep up the economy no end, stoke up future inflation and put overseas investors off sterling at a stroke. The pound would dive, the economy, even manufacturing, would boom, and everybody would be happy - until the time came to slam on the brakes again.
Getting away from this pattern is precisely why we now have an MPC.
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