Note: Some comments were written before the Bank’s statement on September 5
regarding plans to add liquidity to the market.
Sir Alan Budd
Former chief economic adviser to the Treasury and former Bank MPC member
HOLD
I have just come back from Jackson Hole with all the central bankers. I think
there is enough uncertainty about credit markets to make it sensible to wait
for at least a month to see how the effects may come through to the real
economy. Even if this is mainly a US problem, we would not fully escape any
developments there.
Claudio Costamagna
Former chairman of Goldman Sachs investment banking operations in Europe, the
Middle East and Africa
HOLD
I would vote again for leaving the rate unchanged, given the overall situation
of global financial markets, which is still quite uncertain and relatively
fragile.
Bronwyn Curtis
Chair of the Society of Business Economists
HOLD
I have voted for “no change” but I would accompany this rate announcement with
an explanatory statement giving some guidance on the potential impact to the
real economy.
Higher money market rates and the widening in credit spreads is an effective
tightening in monetary policy over and above the 1.25% rise in the Bank Rate
that is still working through the economy. Even if the liquidity crunch is
relatively short-lived, the widening in credit spreads and the re-pricing of
risk is a longer term phenomenon. The net result is that borrowers will be
paying more even with unchanged rates.
It is possible (although unlikely) that the impact is no more than the 6% Bank
Rate expected by early 2008 before this round of turmoil, but the external
environment has changed as well. Historically, periods of de-leveraging have
had an adverse impact on the economy. Business investment and household
consumption of durables have buoyed the UK economy. These are two of the
most sensitive sectors to the cost of capital so, if confidence in the
economy wanes, it could slow quite quickly.
Geoffrey Dicks
Chief UK economist, RBS Financial Markets
HOLD
The drop in CPI inflation to 1.9% in July is symptomatic of an underlying
weakness on the consumer side of the economy that was already in place
before the full effect of the MPC's monetary tightening had taken effect.
The turbulence in financial markets will result in tighter credit conditions
even without any change in official rates. A case for cutting rates can be
made but it is not quite firm yet. In the meantime there is absolutely no
case for a rate hike.
Anatole Kaletsky
Chief economics commentator, The Times
HOLD
If interest rates were at the right level last month, then there should now be
a bias towards easing, given the financial disruptions of the summer. This
financial turmoil will potentially have more impact in Britain than in the
US or Europe, because of the economy's depedence on a rapidly growing and
highly profitable financial services industry.
Liquidity problems in Britain also seem to be substantially more severe than
they are in the US or Europe. Throughout the past three weeks, spreads
between three-month and overnight money have been much wider in London than
in New York or Frankfurt . These spreads have imposed much higher interest
rates on the real economy than the MPC envisaged at its last meeting. The
persistent spread widening is also starting to damage the credibility of the
British banking system and the reputation of London as a financial centre.
The Bank of England needs to be more pro-active and pragmatic in dealing
with the dislocations in London's money market.
Rupert Pennant-Rea
Former Deputy Governor of the Bank of England
HOLD
For better or worse, in the past couple of weeks the interbank market has
produced some monetary tightening of its own. With so much uncertainty
around, the MPC should stand back this month and leave its own rate alone.
Only a genius or a fool can now be certain whether the next move in rates
will be up or down.
The wider question is whether the Bank should be doing and saying more about
the apparent silting-up of the short-term credit markets. In my view there
is currently no systemic threat, so it is better to let the financial
institutions sort themselves out. The Bank’s discount window is open, at a
suitably penal rate: that is enough. The recent financial turmoil has come
not from mistakes in official policy but from unwise lending. Those who make
a mess should clear it up.
Sir Steve Robson
Former Second Permanent Secretary at the Treasury
HOLD
It would be inappropriate to move until we have a clearer view on how the
combined impact of rate rises over the past year and the current financial
volatility are affecting the economy. At present the UK economy seems to be
robust but only part of past rate rises have so far fed through into
mortgage payments and, in addition, the repricing of risk - if sustained -
could affect borrowing by companies as well as individuals.
On the Bank, its performance to date has been far superior to that of the Fed
or the ECB. The Bank has done exactly what it had said it would do - lend at
its predetermined penal rate. Such predictability is really important at
times like these. By comparison, the ECB appeared to panic and so added fuel
to the flames while the Fed allowed itself to appear to be at the beck and
call of politicians. Neither response is good for their credibility and
credibility is at the heart of central banking.
I have doubts about any statement by the Bank on overnight lending. There is a
risk - pace the ECB - of raising more questions than answers.
Sushil Wadhwani
Former member of the Bank’s MPC
HOLD
I would vote to leave the Bank rate unchanged this month, but with a view that
the risks lie to the downside of my central projection for inflation because
of the recent financial and credit market developments.
As I have said previously, the monetary tightening so far has probably been
too great, with the full effects yet to come through. Inflation has already
fallen by more than the MPC expected, and though month-to-month movements
can be volatile, the difficulties in credit markets make it more likely that
inflation will continue to surprise on the downside. Though the Fed's
discount rate cut appears to have been associated with an equity rally,
there are ongoing difficulties in the credit markets. The spreads between
interbank LIBOR interest rates and Treasury Bill rates indicate continued
distress and have tightened monetary conditions independently of Bank rate
and the Asset Based Commercial Paper market still has very significant
difficulties. The credit "bubble" that has grown over the past few years
has probably burst and these things rarely occur painlessly.
Forecast-based policy needs to allow for the likely effect of the tightening
in the price and availability of credit. In such circumstances, some of the
hard economic data is "old news", and we need to focus on the most timely
indicators. There are, however, considerable uncertainties about credit
conditions, their impact, and the underlying strength of the economy. I
would therefore wish to wait and see with respect to changes in Bank rate.
Martin Weale
Director, National Institute of Economic and Social Research
HOLD
I thought the July rise was unnecessary and the question is starting to arise
whether it should be reversed. However it is hard to imagine that a
quarter-point for a few months makes very much difference.
The Bank of England's conduct in the crisis has been exemplary. So far there
is no evidence that non-financial businesses have been affected by it and it
would not be right for the Bank to change policy unless they are. Banks are
understandably reluctant to lend to each other but it is not clear that this
should affect key retail lending with good security, for example on
mortgages. Institutions which are short of retail funds may have difficulty
in raising money but they should be displaced by institutions with excess
funds which no longer want to risk their money in the inter-bank market and
prefer to make loans with good security.
Today (5th September) the Bank has decided to increase liquidy to the system
by providing extra credit at the Bank Rate rather than Bank Rate +1 %.
However the extra credit is limited in volume and duration. It will provide
help to institutions which are short of liquidity and by reducing the need
to borrow at Bank Rate plus 1%, may avoid disruptive speculation about major
problems at some Banks. The measure is likely to reduce pressure on 3-month
rates.
If high inter-bank rates do start to permeate the "real" economy the case for
a reversal of the July rise would be strengthened. But without this we
should remember that the financial institutions affected by credit problems
must have allowed for this sort of situation in their business planning. As
with so many other businesses it is their skill which makes profits but
someone else's fault when they make losses. The pressure for lower rates is
best summed up by Mandy Rice-Davis's comment: "They would say that wouldn't
they".
