Friday, March 16, 2007
Stock markets, savings and interest rates
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

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Andrew Sentance of the Bank of England's monetary policy committee (MPC), thinks that with the economy close to capacity a rebalancing is needed, with slower growth in both private and public consumption. We'll get more news on the latter in the budget on Wednesday.

Sentance, delivering the RBS Scottish Economics Society annual lecture, is also concerned about global imbalances - driven by high savings in China and other Asian economies and low or negative savings in America - and the unwinding of those imbalances. He also thinks central banks should not repeat the errors of 1987 by cutting interest rates in response to stock market weakness.

Comments

On the personal savings side, the way in which debt repayments and savings are conflated is very unhelpful.

The high savings ratio when mortgage interest rates were 15% is just saying that debt repayments at 15% interest were a high proportion of disposable income - and at the margin, unsupportably high resulting in repossessions. Therefore Andrew Sentance's policy of raising interest rates is likely to produce an increase in the personal savings ratio, associated with a decline in the purchase of financial instruments and what many readers would see as savings - i.e. savings ahead of purchase or to smooth consumption.

Company saving is of course partly pension fund contributions rather than saving for investment. It would be nice to know what the effect of these two factors on savings as considered in national accounts terms is, and therefore what the trends in other savings might be.

Posted by: Paul Bivand at March 16, 2007 11:54 AM