Ex MPC duo urge Bank to cut rates
Two of the most respected former Monetary Policy Committee members have urged the Bank of England (BoE) to cut borrowing costs tomorrow.
Willem Buiter and Sushil Wadhwani have warned that unless the Bank reduces rates by at least a quarter percentage point it risks leaving the economy even weaker over the coming months.
However, Prof Buiter said he expected the Bank to leave rates unchanged, accusing it of being "wimpish". Dr Wadhwani said that by waiting too long the Bank was in danger of returning to the "bad old days" of backward-looking monetary policy.
The double-warning intensifies the dilemma facing the nine MPC members in their two-day meeting, which begins today.
The majority of City economists expect the Bank to leave rates on hold at 5.75pc, despite having indicated in last month's Inflation Report that it is poised to cut rates by at least half a percentage point over the next year.
Since then, the credit crunch has returned to haunt the City's money markets, pushing up the London Interbank Offered Rate to new peaks.
Three-month Libor rose to just under 6.65pc yesterday, closing in on highs reached in the first wave of credit market chaos in August.
Prof Buiter, now of the London School of Economics, said: "If I was predicting 50 basis points of cuts [as the Bank did in the Inflation Report] I would have done it already. I never understood all this waiting around for better information. You make the forecast and you act. Otherwise it seems kind of wimpish.
"This financial kerfuffle has been going on since August. What are we going to learn from [waiting] another month? You don't want to be running behind the curve."
His concerns were echoed by Dr Wadhwani, who now runs an eponymous hedge fund.
"Our view on the committee was that you always want to be pre-emptive [with rate decisions] because you end up doing less than you would otherwise have to," he said. "You don't hold back and wait for the data to weaken - that's how monetary policy was conducted in the bad old days.
"I have been surprised they haven't cut already. I think they should really be getting on with it."
To add to the pressure faced by the Bank, its Canadian counterpart surprised markets yesterday with a surprise cut in its borrowing rate.
All attention will now be focused on today's services survey from the Chartered Institute of Purchasing and Supply. If it is weak, it could push the MPC into making a cut, said Prof Buiter.
He added that households and young businesses would be the main victims of the squeeze, as banks pass on higher borrowing costs to them.
"Any start-up is gong to be clobbered by this, but most existing businesses are pretty flush at the moment," he said. "I doubt what's going on with 3-month libor affects all businesses. For new businesses it will be a very rough time - as it will for households."
The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
Willem Buiter and Sushil Wadhwani have warned that unless the Bank reduces rates by at least a quarter percentage point it risks leaving the economy even weaker over the coming months.
However, Prof Buiter said he expected the Bank to leave rates unchanged, accusing it of being "wimpish". Dr Wadhwani said that by waiting too long the Bank was in danger of returning to the "bad old days" of backward-looking monetary policy.
The double-warning intensifies the dilemma facing the nine MPC members in their two-day meeting, which begins today.
The majority of City economists expect the Bank to leave rates on hold at 5.75pc, despite having indicated in last month's Inflation Report that it is poised to cut rates by at least half a percentage point over the next year.
Since then, the credit crunch has returned to haunt the City's money markets, pushing up the London Interbank Offered Rate to new peaks.
Three-month Libor rose to just under 6.65pc yesterday, closing in on highs reached in the first wave of credit market chaos in August.
Prof Buiter, now of the London School of Economics, said: "If I was predicting 50 basis points of cuts [as the Bank did in the Inflation Report] I would have done it already. I never understood all this waiting around for better information. You make the forecast and you act. Otherwise it seems kind of wimpish.
"This financial kerfuffle has been going on since August. What are we going to learn from [waiting] another month? You don't want to be running behind the curve."
His concerns were echoed by Dr Wadhwani, who now runs an eponymous hedge fund.
"Our view on the committee was that you always want to be pre-emptive [with rate decisions] because you end up doing less than you would otherwise have to," he said. "You don't hold back and wait for the data to weaken - that's how monetary policy was conducted in the bad old days.
"I have been surprised they haven't cut already. I think they should really be getting on with it."
To add to the pressure faced by the Bank, its Canadian counterpart surprised markets yesterday with a surprise cut in its borrowing rate.
All attention will now be focused on today's services survey from the Chartered Institute of Purchasing and Supply. If it is weak, it could push the MPC into making a cut, said Prof Buiter.
He added that households and young businesses would be the main victims of the squeeze, as banks pass on higher borrowing costs to them.
"Any start-up is gong to be clobbered by this, but most existing businesses are pretty flush at the moment," he said. "I doubt what's going on with 3-month libor affects all businesses. For new businesses it will be a very rough time - as it will for households."
The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
Labels: Bank of England, Monetary Policy Committee, Weak Sterling
posted by Wise Money @ 9:57 AM
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