Victoria Scholar discusses rise in interest rates
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The BoE has increased base rates for 10 meetings in a row as it battles to curb inflation.
Its monetary policy committee (MPC) is expected to increase base rates again at its next meeting on Thursday.
Markets anticipate a increase from four percent to 4.25 percent, but now a former MPC member has warned this will trigger economic disaster and the BoE must reverse course with immediate effect.
He says higher borrowing costs have triggered the global banking crisis, and the BoE and other central bankers need to change course as contagion spreads.
Our financial system cannot withstand withstand higher borrowing costs and we now face a repeat of the financial crisis of 2007/09, or worse.
David Blanchflower, a BoE policymaker during the financial crisis, has said there is an “urgent need” for base rates to be slashed to three percent on Thursday.
More cuts must follow to avert disaster, he added.
Blanchflower and fellow economist Richard Murphy said the MPC needed a rethink after the collapse of Silicon Valley Bank in the US, and the £44billion bailout of Credit Suisse by the Swiss authorities.
They called for further monetary stimulus to prevent the UK from meltdown and support for their arguments are growing.
Yet the Bank seems unlikely to listen.
After the last financial crisis, the BoE launched quantitative easing (QE), sometimes called “virtual money printing”. It issued a staggering £895billion worth of bonds to boost the money supply and get the economy moving again.
Lately it has switched to quantitative tightening (QT), buying back some of those bonds as part of its war on inflation.
Blanchflower and Murphy say this is a huge mistake. They want the Bank to unleash another £50billion of fresh QE immediately, saying this would ease the pressure on Britons by slashing mortgage and business borrowing rates.
They urged the BoE to grab this opportunity or risk pushing us “towards almost inevitable recession or even depression”.
Blanchflower isn’t the only one worried.
AJ Bell investment director Russ Mould said the BoE may soon be forced to put on a “repeat performance” of the bailout measures used during the banking crisis.
“Central bankers and policymakers need to bolster faith by stopping runs on deposits, boosting asset prices and get credit flowing again,” he said.
Otherwise the banking crisis may spill over into the real economy and provoke a deep recession, Mould added.
He said interest rate cuts and QE were the main tools to fight the last banking crisis and will be even more important this time. “The world is now so much more indebted than it was in 2009 and simply cannot afford a credit shock.”
Mould said it only took a “tiny blip in credit growth” in 2008 to trigger a meltdown of “epic proportion”. “We can’t afford that now as the global economy relies on ever increasing amounts of cheap debt. A recession would surely follow”
The BoE, US Federal Reserve and European Central Bank will be reluctant to reverse course until inflation is beaten but Mould warned: “They may soon have no choice as inflation is the lesser of the evils on offer.”
Cutting interest rates and issuing more bonds would boost the economy but it would also be an admission that the world is hooked on cheap money.
Near-zero interest rates and QE were supposed to be temporary measures. Soon they could be permanent.
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