When this blog was running on the department's VLE, a week didn't go by without some reference to the dilemmas facing the Bank Of Engalnd's Monetary Policy Committee (MPC). At that time the tension was between keeping interest rates unchanged to keep inflationary pressures under control and bringing them down to anticipate a feared slowdown in economic growth.All that seems a long time ago now! The crises in the financial markets have dominated thinking - Paulson plans, rescue packages, nationalisations and falling stock markets to name but a few debates raging. Last week's 0.5% co-ordinated cut in interest rates by the Bank of England the Federal Reserve and others didn't get the attention it might otherwise have got in more 'normal' times.
However, the global slowdown now gives central banks greater freedom to act to loosen monetary policy. Oil prices have fallen and so too have commodity prices. The inflationary pressures that concerned central bankers at the beginning of the year are receeding.
And so, some economists are now predicting historically low interest rates by the end of 2008. Roger Bootle, interviewed on Radio 4's Money Box programme, has predicted that interest rates might fall as much as 1% by Christmas and be down as low as 2% by next spring. If they did fall this low it would be the lowest interest rates have been since the creation of the Bank of England in 1694.
Forecasts are just that, forecasts. What is more important than whether interest will fall is what impact falling interest rates will have on the economy. Will lower interest rates stimulate spending and growth and can governments rely oon monetary policy alone to fend off a recession?
Two quick questions (give your answers via a comment to this blog)
1. Under what circumstances might reductions in the Bank of Engalnd's interest rate have little impact on the overall level of spending in the economy?
2. What is the 'liquidity trap' and with which British economist is this concept most closely associated?
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