Outlook: Buiter's approach is as good as any
Thursday 22 October 1998
Plainly things have changed considerably over the past few months. The turmoil in financial markets and the slow down in the world economy might seem quite enough of themselves to justify such a change of heart. But nobody else on the committee has moved so far so fast as a result of these events. So why has he done it, and what does it mean?
One thing is for sure; it is not much to do with concern for jobs in the North of England. As the pips began to squeak in manufacturing, Mr Buiter was urging his colleagues on to ever higher interest rates, apparently oblivious to the pain being felt up North. He was voting for interest rate rises regardless of how far the pound strengthened.
Eddie George, Governor the Bank of England, seems to have been misquoted in the regional press as saying job losses in the North were an acceptable price to pay to curb inflation, but certainly Mr Buiter took that view.
So is it that Mr Buiter just likes to shock, to play the maverick? There may be an element of that, but it is also to do with the fact that Mr Buiter's approach to monetary policy is in part intuitive. In these markets that may turn out to be worth any amount of detailed analysis and number crunching. It's hard enough to assess where the economy is heading right now given the volatility in markets, but even historic information about what's been going on is proving to be highly unreliable.
At this month's meeting, the MPC had to grapple with the fact that the earnings figures for May and June had been revised upwards as a result of changes in the way they are compiled. Since then the rest of the data has been changed, this time downwards. In other words, in deciding to reduce interest rates by just a quarter per cent, the MPC was working on the basis of faulty information.
As it happens there is other data available to suggest that earnings and jobs are continuing to grow at quite a rate, but even so Mr Buiter is justified in believing he's boxing in the dark. There's no certainty about what's happening in the economy.
In these circumstances it seems entirely reasonable to over adjust against the risk of recession, just as Mr Buiter may have been voting for an over adjustment against the risk of inflation in his previous incarnation as a hawk.
There can be no doubt that interest rates are going to have to fall considerably over the next year. The Bank would be well advised not to repeat the mistake it made in its first year of independence - when rates were increased too slowly to deal with the build up of inflationary pressures - by being too cautious with its cuts now we are on the other side of the cycle.
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