Adam Smith Institute

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Pragmatic points

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pragmatic-points

A leader in yesterday's Telegraph struck the right note on the Bank of England's expected interest rate cut this week. It makes a series of points:

Firstly, "sleepy mishandling of interest rates allowed inflation and consumer credit to expand excessively". Indeed: interests rates stayed far too low for far too long, fuelling a credit binge, inflating an asset bubble, and storing up the trouble which has now brought the UK economy to (at best) a standstill.

Secondly, with a recession looming, the Bank of England was too slow to reduce interest rates. This is also true – just as easy lending and widespread mortgage securitization served to increased the money supply, their sudden collapse indicates a severe monetary contraction. The government should not try to re-inflate the economy – painful as it may be, we need a readjustment – but that doesn't mean interest rates shouldn't be cut. Deflation is probably a greater risk than inflation at the moment.

Thirdly, cutting interest rates is rather unfair on savers, since "saving in many high street accounts [already] involves losing money in real terms". This point is too often neglected – why should savers (who have behaved responsibly) lose out because lenders and borrowers (who haven't) have got themselves into trouble? The Telegraph therefore proposes that, as compensation, "the Government should eliminate tax on interest, making saving more attractive and also helping to make London attractive to global depositors, which will strengthen our banks."

So: the Bank of England should cut interest rates, and the government should eliminate the tax system's bias against saving. Sounds like good sense all round.