Monday, 7 January 2008

Interest Rates Hijacked by Politics

THE TELEGRAPH: The Bank of England faces another tough decision on Thursday. Having cut interest rates to 5.5 per cent in December, the Monetary Policy Committee is this month expected to keep borrowing costs on hold.

In last week's Reuters survey, 51 of 63 "leading economists" said the MPC should wait until February, or even longer, before lowering rates again.

Economists can be fickle, though, coming under all kinds of pressure to fit their predictions to their paymasters' views. The weekend before the December rate cut, like now, various economists' polls showed that few wanted lower rates, given the dangers of rising inflation.

But then, in the final few days before last month's MPC meeting, almost all those refusniks buckled - as City and industry bosses piled in, predicting economic meltdown unless borrowing costs were slashed. 

Within 72 hours, most "independent experts" had shifted their position from one where the Bank shouldn't risk cutting rates, to one where it would be "irresponsible" - an emotive, threatening word - for the MPC not to act.

Given that climate of fear, it was perhaps unsurprising that the committee voted 9-0 in favour of lower rates - despite CPI inflation of 2.1 per cent, the far more reliable RPI measure at 4.3 per cent, crazy oil prices and inflationary expectations at an eight-year high.

Over the next three days, I suspect last month's pattern will repeat itself. Our most prominent economic analysts will, once again, trim their views to coincide with the short-term interests of the investment banks, retailers and ministers - all of whom desperately want lower rates to put a gloss, respectively, on their sub-prime exposure, share prices and standing in opinion polls.

And this, despite the fact inflation will get a lot worse before it gets better and repeated rate cuts risk doing serious damage to the Bank's credibility and, in turn, to the UK's long-term prospects. Interest rates have been hijacked by politics >>> By Liam Halligan

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