With inflation in the UK down to 2.3 per cent now and some suggesting that the Bank of England ought to hold interest rates at 5.25 per cent until later in the year, it would seem as though the ‘less is more’ approach might have been taken off the table.
If the UK ends up being one of the first European countries to reduce interest rates, following on from Switzerland, then they will surely have proven to have been pragmatic post-pandemic. Whilst the cost-of-living crisis in the UK has certainly been worse than it has in other countries, in part, perhaps, due to Brexit, the way forward is not as far away as it was for Brexit.
It is only now a matter of who is going to reduce interest rates first. In the same way that contagion can occur in an inflationary context and in the way that one country adopts another’s approach to resolving the many problems associated with inflation, contagion can also occur in the context of central banks’ decisions to bring interest rates down.
Switzerland and Mexico started the downward trend and it seems apt for another country to follow suit. As the latter’s interest rate was rather high, at 11.25 per cent, the reduction certainly seemed appropriate. Relative to what interest rates have been over the last 30 years in other countries, the same principle could apply as well.
So, which central bank will back itself next and take a small risk, knowing that others will only follow and lay the foundations for their decisions to be effective, as confidence effectively creates more confidence, and what other than confidence can ultimately increase productivity? In excess, of course, it can have the opposite effect; however, I do not believe that we are in danger of this being the case right now.
With Britain now out of a recession and GDP growth over the last quarter greater than forecasts anticipated by a not insignificant amount – 50 per cent (0.6 per cent growth vs a predicted 0.4 per cent), surely it would be a total waste of an opportunity not to capitalise on this unique chance to increase GDP growth by adopting a more optimistic and encouraging tone?
Optimism is the greatest accelerator of anything when combined with realism, which the 50 per cent certainly strikes me as reflecting. If there was ever anything that could bring interest rates down, it has always been productivity. Sustainable, entrepreneurial levels of productivity are the only way to keep any economy healthy.
Furthermore, inflation in the US is at 3.4 per cent to the year ending April and it is staying steadily within the target range in Europe, at 2.4 per cent. England has always been a source of innovation, so why couldn’t the Bank of England be now?
Moreover, everyone is happy that the recession is over. However, is the cost-of-living crisis and is the post-Covid wane in morale or social norms?
Perhaps not, perhaps so; I would say that the odds favour the former, which is far from ideal. The best way to counteract this though could be to reduce interest rates and allow a virtuous circle to begin, particularly pre-election.
It would definitely be a shame to a miss out on an opportunity or chance to change the situation for the better. How couldn’t it be so?
