Outlook: Interest rates

THERE ARE two schools of thought about how to run a successful independent monetary policy - the Federal Reserve's way of doing it and the Bundesbank's. In recent years, they have been equally successful. The differences and many and varied but they are best characterised in the following way.

At the Federal Reserve, Alan Greenspan always has half an eye on what Wall Street is up to and how the markets will react to his decisions. Then there is Hans Tietmeyer who in the proud tradition of German central bankers instinctively hates money changers, and believes that it is the job of a good central bank to ignore them.

Britain's monetary policy committee is still finding its feet. As the committee approaches next week's crucial interest rate decision, it will be weighing the two approaches in the the balance. Should it respond to the latest seizure in financial markets and the sharply deteriorating outlook for the world economy by cutting rates? Or should it ignore the siren warnings, and look only to its own number crunching for direction?

The differing approaches of Messrs Tietmeyer and Greenspan may have as much to do with their backgrounds as the very different economies they are charged to control. Mr Greenspan had a successful career on Wall Street before going into central banking, while Mr Tietmeyer came up through the world of politics.

But they also reflect the vastly different structure of the economies of Germany and the United States. For all the recent hoo-hah about Germans rushing to buy equities, the fact remains that while the German stock market could go pop bang and no one outside Frankfurt would notice, the 20% fall in the American stock market is another matter altogether. The impact on the real economy will be significant.

Mr Tietmeyer was in his element when he told a well-fed gathering of Frankfurt bankers this week that there was no sign of global economic recession and rejected calls for a rate cut to steady the markets' jangled nerves. Obviously, central bankers should be very mindful of the experience of October 1987 when the G7 cut rates in response to the crash only to find out later that they would have been better to leave well alone. The cut accentuated the latter stages of the boom and made the subsequent bust that much worse.

On the other hand, the Monetary Policy Committee has more than just the crisis in world markets to act on this time round. Even the overheated service sector is now slowing noticeably. In the US, Mr Greenspan has been happy to let the markets think the Fed will let US interest rates fall if there is any sign that the economy is being hurt by the Asian and Russian crises. The Bank of England should be doing the same.

One potential problem with this approach is that there is no obvious mechanism for it. At the end of the MCP's two day meeting, the Bank either raises rates, cuts them or leaves them unchanged. We don't know the thought process that went into the decision until the minutes are published six weeks later.

If the Bank decides, as seems likely, once more to leave rates unchanged, it should nonetheless attempt to find a way round this difficulty. A month ago it was still credible to claim that the balance of risks lay more in breaching the inflation target than Britain tipping into recession. Since then an awful lot has changed. It is not just the fact that stock markets are falling. The crisis in the Far East has been shown to be a lot more serious than we thought. Meanwhile, domestically, evidence of a slowdown continues to pile up. House prices are down, car sales are down, no one seems to be able to shift anything on the High Street. Commodity prices are at their lowest for decades. It is hard to see how the risk of inflation taking hold are greater at the moment than the risk of sliding into recession.

Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
PROMOTED VIDEO
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Sport
Colombia's James Rodriguez celebrates one of his goals during the FIFA World Cup 2014 round of 16 match between Colombia and Uruguay at the Estadio do Maracana in Rio de Janeiro, Brazil
sportColombian World Cup star completes £63m move to Spain
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
News
news
News
i100
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Travel
Fair trade: the idea of honesty boxes relies on people paying their way
travelIt seems fraught with financial risk, but the policy has its benefits
News
people
Sport
Antoine Griezmann has started two of France’s four games so far
sport
Life and Style
techYahoo Japan launches service to delete your files and email your relatives when you die
Life and Style
Child's play: letting young people roam outdoors directly contradicts the current climate
lifeHow much independence should children have?
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

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Business Analyst (Agile, SDLC, software)

£45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

Finance Manager - Bank - Leeds - £300/day

£250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

£100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Meet the man who doesn't want to go down in history as the country's last Scottish Secretary