Zeev's Turnips Patch-No Politics (ZEEV)

[Smart_Money]

The world economy needs a reduction in interest rates

http://www.timesonline.co.uk/article/0,,542-468768,00.html

At the beginning of this year the question asked about the monetary authorities in the United States and Britain was “when will they increase interest rates?” The question levelled at the European Central Bank (ECB) then was “could they not cut rates further?” After a difficult period for the world economy, with estimates for growth in most industrial democracies being revised downwards, the questions raised at the outset of a crucial week are “will the Federal Reserve Board and the Bank of England entertain a further reduction in interest rates?” and “why on earth is there any debate about this issue within the ECB at all?” The central banks of the United States, Britain and the eurozone need to demonstrate some leadership and in concert.
The position of the ECB was once perplexing but now verges on the perverse. The single most significant source of weakness for the world economy today lies with the eurozone, notably Germany. Growth in Europe’s largest economy has ground to a miserable 0.5 per cent this year and there is not much hope for a notable improvement next year. Interest rates are too high to permit such an expansion. The ECB should cut interest rates by 0.5 per cent to demonstrate its belated appreciation of the scale of the problem. A 0.25 per cent reduction would offer the impression of a reluctant concession tossed at protesting politicians and hardly a wholesale shift in sentiment and strategy. The ECB should aspire to be an engine of renewal, not a handbrake.

The argument in the United States is more complicated. The third quarter of the year did witness growth of 3.1 per cent, disappointing at this stage of the economic cycle but not a disaster. The American recovery is, however, being powered by the consumer and is especially dependent on cheap automobiles. This cannot continue indefinitely, and the most recent statistics released on Friday suggest some deceleration in this sector. Business confidence and corporate profits are in a dire state and few are willing to contemplate expensive new investment. In these circumstances, it is worth the Federal Reserve Board accepting whatever risks might come with a 0.25 per cent cut. Alan Greenspan should, once again, set other central banks an example. A serious slowdown in the US in 2003 would torpedo the global economy.

The Monetary Policy Committee (MPC) at the Bank of England faces a different dilemma. Growth, while subdued, is higher than in the eurozone while business executives are not quite as pessimistic in this country as in America. Rates are low by recent historical standards and there have been fears expressed about both a boom in consumer debt and a rampant property market. A majority of the MPC therefore opted at its last meeting to hold rates steady. It is worth reconsidering that position. Debt as a proportion of income is not out of control. The surge in house prices in London and the South East seems to have abated. On balance, an additional stimulus now is preferable to the possibility of stagnation later.

In each case, it is right and proper for those casting their votes to consider the outlook for inflation. A spurt in growth in 2003 purchased at the price of pronounced pressure on prices in 2004 would not be much of a bargain. But all the evidence indicates that, in the eurozone, the United States and the United Kingdom, inflation is not waiting in the wings hoping that reckless central bankers will let it leap into the limelight. There is, if anything, a contention to be made that deflation cannot be discounted. A co-ordinated reduction in interest rate cuts this week would be rational and responsible. The question that must not be asked in 12 months’ time is “why did the monetary authorities not intervene last November?”




http://www.timesonline.co.uk/article/0,,542-468768,00.html