Negotiation, Negotiation, Negotiation

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The Government WILL take back control of Interest Rates, rather than leaving them with the BoE

Posted by markharrison on August 8, 2007

After my article about Market Crashes at the weekend, I’ve had some questions about my comments about Government.

My view remains that interest rates will (again) be set by politicians at some point in the future, but my reasoning is slightly non-trivial.

  • When he was Chancellor, Gordon Brown oversaw the transfer of base rate control away from the Treasury, to the Bank of England.
  • The purpose of doing this was to demonstrate that he was putting long-term inflation control ahead of short-term political tinkering. (Something that both parties have been guilty of.)
  • The BoE is mandated to keep inflation low.
  • The BoE will (almost certainly) do a great job of managing this.

The problem will comes later in the market cycle. At the moment, high inflation is seen as a terrible spectre. However, there will come a point (because there always does) when unemployment rises, and mass unemployment is suddenly seen as the bogeyman. After this has gone on for a while, people (newspapers first, then blokes down the pub) will start talking about how “it’s this low-inflation policy that’s costing jobs.”

Once this cry reaches fever pitch, the Government will have one of two choices:

  • Take back control over base rates
  • Give the BoE a new mandate

This will, of course, be done in the name of democracy, and spun as “good politicians listening to the people, and giving elected officials, the peoples’ representatives better power than faceless bankers.”

Now, what bit of that doesn’t sound like interest rates being used for political purposes, rather than fiscal ones ?


2 Responses to “The Government WILL take back control of Interest Rates, rather than leaving them with the BoE”

  1. Alex Barns said

    Every intervention on the base rates will always look suspicious in the eyes of the informed elector. The politicians always have to either dissociate themselves from awkward events or try to advocate their role in the good ones.
    Checking the latest house prices (for instance of property in Roehampton)and comparing the differences with a previous report can be very useful in helping to understand when the move is financial or political.

  2. gavin said

    What makes you think that the Bank of England has control of interest rates? All the appointees are signed off by the chancellor. They try and make it look arms length but its apretty short arm!

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