Near-zero interest rates won’t refloat the economy

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SIR – We shouldn’t bank on lower interest rates getting us out of the credit crunch.

They may encourage consumers to borrow and spend more, and make it cheaper for businesses to expand. But there are more savers than borrowers in Britain, and they have seen the income from their savings cut by four-fifths. Savers aren’t rushing out to spend — indeed, they are cutting back.

Secondly, lower interest rates drive down the pound. The Government needs to borrow huge sums to fund its bank bail-outs, but with money so scarce at home, much of that will have to come from abroad. A weak pound makes that borrowing hugely expensive.

Thirdly, interest rates at 1 per cent dent confidence, as people fear that the Government is running out of weapons to combat recession. A decade of near-zero interest rates in Japan has not solved their banking crisis.

The British economy might be refloated by lower taxes and cuts in business regulation, but not by lower interest rates.

Dr Eamonn Butler
Director, Adam Smith Institute

The Telegraph, Letters (7 February 2009)