Crisis, what crisis, time again in Britain

July 7, 2009

Britain’s recession, like the downturns in most other places, is being hailed as either having reachえd bottom or tailed off in its decline. The latest to trumpet the beginning of the end is the British Chambers of Commerce, which said business orders and sales had continued to fall in the second quarter but at a slower pace than previously.

So does this mean that the Bank of England will soon start raising interest rates from the negligible 0.5 percent reached last year as policymakers sought to pump liquidity into a failing economy? Not according to researchers Capital Economics, which argues in a new report that market assumptions of higher rates at an early stage are misplaced. They offer three reasons:

A return to strong levels of activity and rapid price gains in the housing market is unlikely for some time, even at very low interest rates. Meanwhile, the overall economy is likely to expand at only sluggish rates in the foreseeable future. And even if the recovery continues to gather pace, the large amount of spare capacity – or slack – in the economy suggests that there should be no hurry to tighten policy at all.

— Even when monetary policy is finally tightened, some part of this will involve the reversal of the Bank of England’s quantitative easing programme. Although the likely order of events is far from clear, this could delay the need for a conventional tightening in the form of higher interest rates.

— Thirdly, there is good chance that monetary policy in general takes a back seat to a substantial tightening of fiscal policy as the government responds to the growing pressure to sort out the public finances. This is likely to take the form both of higher taxes and a severe squeeze on public spending and would require monetary policy to be kept correspondingly loose to prevent the economy from slipping back into recession.

So, essentially, the BoE will not be able to raise rates because a) the economy is a long way from good b) it has other things to unwind first and c) life is going to be so miserable for Britons that low interest rates will be their only salvation.

This latter point is beginning to excerise a lot of thought in Britain, with the head of the Audit Commission criticising politicans for failing to be honest about the need for cutbacks, given a forecasted £175 billion public deficit this year — more than 12 percent ofgross domestic product.

“People had better understand this is an unprecedented situation. We have never seen anything like this in your lifetime or mine,” Former prime Minister John Major, who knows quite a bit about crises, told TV presenter Andrew Marr.

(Reuters photos: Eddie Keogh and Darren Staples)

One comment

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Posted by Interest Rates » MacroScope » Blog Archive » Crisis, what crisis, time again in … | Report as abusive

I’m sorry, is this a story about the crisis, interest rates, or budget deficits? Or none of the above. As a news story, it’s incomprehensible, unless you get paid by the word.

I expect better of Reuters.

Posted by Ian Kemmish | Report as abusive