But it is a policy you damn fool!

Saying average bank base rates are going to be below 5% in the future looks like one of the most reliable forecasts anyone can make, based on the long term trend data.

Saying rates may not be far from zero may be almost as reliable now.

But McCafferty did not, of course, draw the obvious conclusion. The first is that in that case monetary policy has little or no roll to play in the economy.

Why will interest rates be low? Because given the economic conditions it will be our policy that interest rates will be low.

Low interest rates are not a proof that monetary policy has no role, it is a bloody monetary policy.

And, second, that in that case giving any significant role in the management of the economy to a supposedly independent central bank makes no sense at all, because the only instrument they have to use is the interest rate and for all practical purposes it will have no impact on economic management in the foreseeable future.

Would having high interest rates change the economic outcome? Then someone still has to decide what monetary policy is going to be, don’t they?

12 thoughts on “But it is a policy you damn fool!”

  1. Well exactly.

    He wangs on about taxes being to control inflation but doesn’t seem to get that fiscal and monetary policies are interlinked. If we go full McDonnell we will soon need much higher nominal rates if we are to keep inflation under control, just to pluck an scenario out of the air. He also doesn’t seem to realise that the Bank Rate is not the only monetary tool, even though even he must have heard of QE.

    He claims to be all into MMT but he obviously doesn’t really understand it. The central bank has unlimited resources to stoke inflation if it wants to.

  2. The problem is many people think that someone needs to seen to be doing ‘something’, they don’t get that choosing to do nothing can sometimes be an even better action.

  3. Just a question, but wouldn’t we all rather central banks didn’t set interest rates? Given the central bank’s regular success in shooting the economy it’s managing in both feet, wouldn’t we be safer without it having the gun & the ammunition? They are essentially economists & economists’ track record at predicting anything economic is up there with astrology & examining sheep’s entrails.

  4. Agreed, Mr in Spain. Steve Baker, one of the few MPs I wouldn’t see hanged from a lamp post, has made the point that we don’t set Tesco’s prices, so why should we do it for HSBC?

  5. Glad you concur, M’Lud. There is a superb calculator for deriving optimum interest rates. The market. Why not use it?

    Incidentally & OT, TW. Notice that now CT doesn’t support auto-login, along with this site. Don’t mind completing the form here, with the aid of the drop-downs. But the fan dance of repeatedly logging into CT, with it’s password requirement, makes it not worth the bother.

  6. That’s weird, because your last comment there, from mere minutes ago, is up on the site at Contel. Without any intervention either.

  7. If that was directed to me, Tim, I lucked in to remembering what password your site required. And amazingly it’s remembered my avatar photo this time. Although this one seems to have deleted it again.
    And it’s bloody annoying so many cheapskate sites like Farcebook & freemail now require complicated passwords. WTF for? Far as I’m concerned, “password” is entirely sufficient, although rather longwinded.

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