Comments: Oil prices soar again but no need to panic yet

"Britain had a record trade deficit in goods and services of 10.8 billion in the latest three months".

But what will this mean for interest rates?

Left unchanged, sterling should fall in response to a worsening trade deficit. Weaker sterling will help exporters and discourage consumption of imports. So the trade decifit should automatically stabilise.

But what if sterling plummets before the trade balance starts to improve? The MPC would have to impose panic rate rises to avoid a jump in inflation.

Why not get a hefty rate rise jab in first to prevent sterling falling? Would the effect on consumers stopping them buying imports be greater than the effect on exporters having to manage with a weaker home market?

And what about the effect on other countries - if we reduce consumption of their goods will they keep buying ours?

Or maybe the MPC should cut interest rates to help exporters and not worry about sterling. After all, the US and Australia have high trade deficits too. How low can sterling go when the US is in a worse situation? Surely the UK inflation effect wouldn't be too bad. Or would it?

Perhaps the MPC should not touch the controls and leave it to the automatic pilot.

Posted by David Sandiford at August 15, 2004 08:50 AM
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