Tuesday, 19 April 2011

Interest Rates – Just go along with the ride

It was good to open my paper this morning to discover that a number of renowned economists had begun to realise what businesses had been telling us for months, a rise in interests rates at the moment would be anything but good news. Businesses who had been speaking to us had not applied any great economic academic ‘know how’ to their thinking just the highly valuable, but all too sadly rare commodity, common sense.

Who would have thought that adding to the costs of people mortgages at a time of economic uncertainty would not have an effect on already fragile growth? Who would believe that raising rates would have an impact on inflation largely caused by increased taxation, rises in the cost of oil and soaring world food prices? Well at least three members of the Bank of England Monetary Policy Committee apparently.

There are occasions when one should ‘doff one’s cap’ to the experts but when they are driven by old fashioned dogma which dictates that when prices rise too fast the only cure is adding to the cost of borrowing they deserve to be castigated. We find ourselves in a world which is very different to the one that used to respond to such a course of action. If proof of that were needed one has only to consider that on a day when Portugal is seeking to be ‘bailed out’ there are also mutterings about the credit rating of the good old USA.

I have no doubt that the world will work its way through this challenging period but it will be made more difficult if we get our strategies wrong. There will certainly be times when it will be essential to stick doggedly to old beliefs but for the time being, and as far as interest rates are concerned, now is the time to hold our nerve and be pragmatic. It might not be a comfortable experience for some members of the MPC but they should just accept that there is little they can do and that they should hold tight and go along with the ride.