It would be a very interesting position to be on the Bank of England's Monetary Policy Committee (MPC) at the moment. Driven by the monetarist policies of both New Labor and the Conservatives, the rule always seems to have been control inflation by raising interest rates. This basic concept seems to have been lost during these Credit Crunch times. In fact since, the Credit Crunch began we have seen interest rates drop from 5.75% down to 5%. They have stayed at 5% for quite a while now though as the MPC are getting more and more jittery about inflation. The panel seems to be adopting a "wait and see" approach. The question that we need to ask ourselves is what is "less bad" inflation or recession?
By cutting interest rates inflation is likely to rise a little, as all the people on trackers and Bank SVR find a little extra money in their pockets from month to month. If interest rates are raised in a measure to control inflation, we could potentially see more companies go out of business as loans become more expensive.
In my opinion, it would be better to see rates drop, as inflation is potentially avoidable, but recession is a much more difficult matter. Let's look at the situation of a typical factory worker. If inflation was to continue at its current level, or even go higher, the factory worker will struggle. They may have to change the way they shop, sell their car and switch to public transport. They may have to start taking a sandwich to work rather than eat at the canteen. They may have to quit smoking or do without their football season ticket this year. Two weeks in Majorca may have to be substituted for a weekend in Mablethorpe. Whatever happens though, the factory worker will be able to adapt.
On the other hand, if interest rates are increased, the factory worker may be called into the office to be laid off. No redundancy payout, just a couple of weeks notice. The factory worker goes to the Job Center the very next day but unfortunately it seems that the same story has been played out at all the other factories. There are now fewer jobs on offer, and twice as many people fighting for the scraps. The Recruitment agencies are not fairing any better as the vast majority have long relied on factories and warehouses as there main customers (NB I expect to see 50% of recruitment agencies finish within the next 24 months). The factory worker faces up the fact that he now has to sign on for the short term. All luxuries will have to be foregone. He needs to write to all his creditors and let them know ofability to pay. Some may offer terms, others will start CCJ proceedings. Note that at the moment, Northern Rock are beginning repossession proceedings after one missed mortgage payment!
What situation would you rather be in? Having to cut your cloth to suit a harsher financial climate, or packing your marriages up to go into emergency housing? The MPC should think along these lines are cut Interest rates NOW.