Sep 19 2007
Now the Bank of England joins the Fed’s party
The huge relief shown by both the US and the Uk Stock markets to the 0.5% (50 basis point) reduction in US interest rates says it all. The UK market bounce from the US news was bigger than the bounce from the Treasury guarantee on deposits. That’s because the interest rate cut is of more lasting use.
The current US monetary establishment has in the past appeared criticial of Alan Greenspan, the former head of the Fed who famously cut interest rates whenever a crisis appeared on the financial horizon. This kept the US economy performing very well, but of course allowed substantial debt to build up. Now it appears that the current Fed feels they have taught the banks and funds a sufficient lesson with the money tightness over the first part of this year, and are now resolved to cut rates to avoid a slowdown becoming a recession. I am glad they are now taking this view. I do not see much of an inflation problem, but see obvious signs of monetary distress with the sub prime crisis, the big falls in house prices in some states, and the likely slowdown of consumer demand.
Today there is welcome news that after weeks of saying it should not intervene in the longer term money markets the Bank of England is going to ease conditions by supplying ??10 billion. It is a pity they did not do this some time ago before the problems of the last week, but I guess it is better late than never.
There is going to be an argument over whether this means the Bank has been overruled by the Chancellor, or whether the Bank has had an independent change of mind. I do not think this is that important. What matters is the fact they are now doing it, which should start to ease the obvious tensions in our financial markets.
No-one can believe any longer that we have an independent Bank, after a week in which the Chancellor himself was part of the decision to make money available to Northern Rock, and the Chancellor himself announced a taxpayer underwriting of any deposit in a UK bank in a situation like Northern Rock. Both these decisions were very important for the conduct of monetary policy and for banking and market supervision. They show that democratic control has been asserted at a time of crisis. If the government has any respect for the truth they will stop reciting their silly soundbite that they made the Bank of England independent.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
The so-called independence of the Bank of England, is, as you rightly say a misleading concept. I quote from Brown’s letter to he BOE of 5/6/97 in which he sets out the conditions for independence.
“The Government will have the power to give instructions to the Bank on interest rates.”
That sentence is unambiguous. Gordon Brown and the Labour government are still running the show, though we can be certain they will use the BOE as fall guys if necessary. It is not in Gordon Brown’s nature or in the Labour party’s culture to adopt a laissez-faire approach to central banking.
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Hey your wrong
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