Things are not like they used to be. Take as an example, code breaking. Sixty years ago, cracking the Enigma code involved a massive military operation.
More recently, Alan Greenspan was magnificent at it. He once said: “If I’ve made myself clear, you must have misunderstood me.”
The European Central Bank was less subtle. It established a form of words, dropping a word here and there meant rates were either going up or down at the next meeting. Use of words like ‘accommodating’, could hint at future rate changes one or even two months ahead.
But the Bank of England didn’t bother with code when last it sat. It dropped one huge warning to the government – and its plans for a massive Keynesian push.
This is what the minutes of the latest meeting said on the matter: “The Government had already announced its intention to bring forward some planned spending commitments. Moreover, the changing composition of output would lead to a fall in effective tax rates from those assumed in the projections. Consequently, it would make sense for the Committee to reassess the required scale of monetary easing after the Chancellor’s Pre-Budget Report.”
Or, to put it another way, if the government spends too much, then future interest rate cuts will be smaller than they would otherwise have been.
The minutes also revealed the bank’s Monetary Policy Committee contemplated an unprecedented 2 per cent rate cut. It appears the factor which stayed its hand were fears that such a move would send the markets, especially the currency markets, into panic. Plus fears that the chancellor would go too far in his Pre-Budget.
So, it seems an odds-on cert that rates will fall again soon, and maybe by quite a bit. Whether rates will fall to 1 or even zero per cent does depend. There seems to be a real danger that the combination of massive government borrowing and falling interest rates could send sterling into a tailspin. This could make it impossible for the UK government to raise the money it needs to fund planned spending. This could in turn enforce hikes in the rate of interest.
For economic policy in the UK, this trade off between the need to kick start the economy and the danger of creating an unprecedented crash in sterling, will be the key factor underlying all major decisions.
My concern is that Gordon Brown may borrow too much, to create a short term feel good and revival in an attempt to grab another election victory.