End of rate cuts?

As the Monetary Policy Committee begins its monthly meeting, an influential think-tank has said there was "not very much point" to the last cut. Martin Weale of the National Institute of Economic and Social Research said that other measures such as the Bank buying corporate bonds would be better. It is not the cost of credit that is deterring borrowers but that credit is not available. The think tank warned that the contraction of credit meant that rate cuts by the Bank of England were now ineffective in stemming the downturn. The NIESR predicted the UK economy would shrink by 2.7% in 2009, its worst performance for 60 years. Link to BBC News

With regard to the lack of available credit, see the video posted on the tutor2u blog. It concerns Leyland Daf trucks, explaining that whilst demand for vehicles is high, many smaller companies cannot get loans in order to puchase trucks whose price is around £100,000. It shows how this affects company production and employment, and its knock-on effects to suppliers and the local/national economy. Link

As the Monetary Policy Committee meets, the Bank of England announced that it has lent £185bn to financial institutions since April under its special liquidity scheme (SLS), set up to allow banks to temporarily swap assets that were difficult to trade, such as mortgage-backed debt, for UK Treasury Bills. It was designed to help encourage banks to resume normal lending practices by reducing the uncertainty that having illiquid assets on balance sheets was creating. Link to BBC News

Inflation ...all the fault of the MPC?

According to an article in today's FT, 'the increase in consumer prices index inflation since mid-2007 can be largely explained by rising global prices for food and energy. The deeper question, however, is why these have not been offset by slower rises or falls for other products and services, as would be expected if monetary policy had been correctly calibrated to meet the inflation target.' The MPC ' allowed excessively loose monetary conditions to develop between 2005 and 2007. Bank rate was cut inappropriately in 2005 and maintained below its neutral level until 2007. During this period, investors’ risk appetites significantly increased. The result was a prolonged period of buoyant money and credit expansion.' They discussed rapid money and credit growth in 2006 and 2007 but'played down the dangers'. The upshot is that official neglect of monetary warning signals has once again been followed by 'an unexpectedly large rise in inflation although the details of the transmission mechanism differ. In effect, loose domestic monetary conditions have accommodated or even supplemented the inflationary impact of rising global costs.' It is also suggested that there is liitle scope for further interest rate cuts in the near future. Read the article.