John Redwood

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The Bank of England’s warning

The Bank is right to warn that inflation will go up again, but wrong if they think this means they need to keep interest rates up. They cannot stop inflation rising a bit this winter - they set that up by fixing interest rates that were too low during the boom times. Today they can decide how quickly we bring the credit crunch to an end, and how much damage it will do to jobs, property prices and activity over the next couple of years.

I find the dithering of the Chancellor and his Bank advisers pathetic. They have lost control of interest rates - rates in the inter bank market are well above the indicative rate the Bank of England is setting. They argue with each other, sometimes in public, about how tight or loose conditions are and whether the economy is slowing down. The MPC is as much use as an academic seminar at the moment. If they want to get back in charge the Bank has to start to lead rates down from the high real levels in the market. (4.5% above CPI inflation)

Let’s make it easier for the authorities - let’s keep it simple. Commercial property prices are falling sharply. House prices have started to fall. Mortgage loans are sharply down. Other loans are more difficult to obtain. Credit is getting scarcer and dearer. Banks are short of cash.

Whenever did you have a future inflation problem on the back of a credit squeeze?
How tough do they want it to get?
It has taken the Bank of England and this Chancellor a long time to understand the need to supply liquidity to a strapped banking system - and a run on an important bank. The US and the European authorities got the message much earlier and did not have runs on their banks. It was easy to foresee – I predicted it on my blog.

Now the UK authorities have grasped this point, can they not also understand why the US authorities have started to cut interest rates and are talking about cutting them some more?

The Chancellor talks about this credit crunch as if it were a US phenomenon, but this is a credit crunch made in Threadneedle Street as well as on Wall Street. Short-term rises in inflation are inevitable and cannot be stopped. If interest rates stay high too much damage will be done to the real economy.