There are two specific points in Professor Meade's letter with which I would take issue. First, his concern that small and often temporary rises in base rate and other interest rates may harm the economy exaggerates their importance. Indeed, resisting market pressures is ultimately counter-productive. While it is important that over the long term interest rates are kept as low as possible, it is totally unrealistic to expect interest rates never to go up.
Effective monetary management requires regular movements in interest rates in both directions. In present circumstances, it seems to me plausible to expect UK rates to edge down initially, against the background of sizeable falls in German interest rates, then increase later in the year and in 1994, when underlying inflation overshoots, at least temporarily, the 4 per cent ceiling.
Second, I believe that Professor Meade's suggestion that a tax be imposed on credit cards is unjustified. Notwithstanding the clear need to switch UK economic resources from consumption to investment in the longer term, it would be inappropriate to damage the fragile upturn in consumer spending that is at long last getting under way. We need a higher savings ratio over the longer term; but to sustain recovery in 1993, it is important that the savings ratio comes down a little.
Also, Professor Meade implicitly attributes to credit-card lending a much greater role than it deserves in the Eighties inflationary boom. The overwhelming evidence is that house lending, particularly through equity withdrawal, was by far the main source of credit creation, which greatly exceeded in importance other forms of borrowing, including through credit cards.
Credit cards are simply one form of financial technology, whose future development will be determined by customer preferences. There is no justification for blaming borrowing through credit cards for the inflationary excesses of the late Eighties, or for Britain's tendency to have a savings ratio that over the longer term is arguably too low.
Chief Economist and
Head of Market Intelligence
National Westminster Bank