Bring on the Zirp
Updated on 06 November 2008
After today's 1.5 per cent interest rate cut, Faisal Islam asks if the UK is heading for a Japan-style zero interest rate policy.
"One of the main factors behind the credit crisis was that Alan Greenspan kept real interest rates negative for far too long," was the point being made to me at around 10am this morning by a former big hitter at the Bank of England.
Two hours later his former bosses perform the most stunning act of economic shock therapy in recent British history.
You have to go back August 1914 for anything remotely comparable when rates were slashed from 10 per cent to 6 per cent.
There were bigger absolute rate cuts by chancellors in 1981 and the 1970s - but that represented two percentage points off 14 or 15 per cent.
So you have to go back to August 1914 for anything remotely comparable, when rates were slashed from 10 per cent to 6 per cent. And even then rates had been at 10 per cent for less than a week.
So, I would say, unprecedented in the Bank of England's history. A monetary neutron bomb.
This is a total reversal of strategy from the Old Lady of Threadneedle Street. There has been a whiff of political pressure from all parties.
Maybe the committee saw the facts (presented repeatedly by MPC former outcast David Blanchflower) and they changed their mind. But they also wanted to provide an aggressive psychological shock.
There has been a whiff of political pressure from all parties in today's interest rate cut.
The downside is that it uses an awful lot of their ammo all at once. And the effect depends on how much the banking system feels should be passed on.
We are heading towards Japanese style policies - even the famous zero interest rate policy, or Zirp, may be deployed.
And in yet more economic bad news: the International Monetary Fund has just reissued its World Economic Forecast. Bottom of the class, in the world, is Britain.
The IMF is predicting a whopping -1.3 per cent contraction in the British economy next year. That is a monster recession - by far the worst in all the countries, advanced and developing, that it covers.
