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Monetary Policy Committee Members Have Got Their Heads in the Sand

21st May 2008 | back to article listings BACK    print this article PRINT

So the MPC committee voted eight to one to keep base rates the same at 5%. Not very sensible.

David Blanchflower appears to get the seriousness of the situation but the rest seem disconnected from reality in an ivory tower. We need to drop base rates fast to keep the economy on even keel. This will not induce inflation. Banks will maintain their high margins on top of base rate, or indeed on top of LIBOR in order to further improve their balance sheets following the nearly insolvent situation many of them encountered recently in the UK (and the US). These high payable rates will keep inflation at bay even though the bank has dropped base rates. This will drop the payable rates ideally back to around 5.75% for most home owners on a secured loan basis and higher slightly for commercial borrowers and unsecured personal borrowers.

General confidence will remain reasonable, inflation under control and wage claims will not be too aggressive due to the current wobbly situation over employment. All in all a soft landing.

Will they do this? If they don't act before the summer and lower base rates eventually to around 4% by the year end they will have to act faster and sharper and we expect base rates to be 3.5% in the early part of 2009 as a necessary over reaction.

This news story has come from the property investment blog by Stuart Law, CEO Assetz plc.

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