Comments: Shadow MPC votes for no change in rates

Are we there yet?

Alan Greenspan said the following this week about ‘neutral’ interest rates: “"We will probably know it when we are there, because we will observe a certain degree of balance that we have not perceived before, which would suggest to us that we're somewhere very close to what that rate is."

Our own Merv-the-no-swerve must be wondering if we’ve reached a certain degree of balance or, rather like an unstable tightrope walker, we’re at the mid point in a major wobble.

My guess is that US interest rates are going to keep going up for much of this year. That will make the pound fall against the dollar and inflation rise. If the MPC were to cut interest rates the inflationary effect could be much worse.

The MPC has been lucky so far because the euro has also fallen against the dollar - for political reasons rather than economic ones. But the euro could easily recover for political reasons too. That would put the spotlight on the UK high-wire act. A rate cut at this stage would appear as a very desperate act. I hope it’s not needed but if the MPC has to cut rates, look out below.

Posted by David Sandiford at June 11, 2005 06:08 AM

The euro stands no chance of recovery through "£political reasons" - the only thing that could strengthen it would be if wispers about the German economy prove to be true (or if the Italians left!).

But agree that a rate cut would probably be counter productive since the effects it would have on confidence would far outweigh any positive effects in the balance sheets.

Posted by Giles at June 12, 2005 11:52 AM