MONEY Bank rate must fall
NICHOLAS DAVENPORT
The great industrial nations of the West are cutting their bank rates and making money cheaper—all except Britain. Npt before it is time—in view of rising unemployment. Each has its problems and all have discovered that very dear money adds to their cost- inflation and does no one any good except the moneylenders. From their peak, interest rates abroad have fallen by as much as two points. Last week the Federal Reserve brought their discount rate down further— from 5; per cent to 5; per cent—the lowest since August 1968. At the same time American bankers' prime' rate was reduced from 61 per cent to 61 per cent. France and Italy followed the American lead—from 7 per cent to 64- per cent, and from 5+ per cent to 5 per cent respectively. The German, like the Dutch, remained at 6 per cent, but the president of the German central bank was quoted as saying that he expected rates to fall substantially in the near future. He did not want to be embarrassed by the inflow of any further foreign money. Yet the British Bank rate remains at 7 per cent to which it was reduced from the crisis rate of 8 per cent last April, and because we offer much higher rates than elsewhere-7; per cent on three months' call in the local mortgage market, against 61 per cent on three months Euro- dollars—'hot' money has been .pouring into London from overseas. Judging from the amount of foreign debt repaid recently-by the- Bank, well over £100 million came in last month. And 'hot' money is just a nuisance. Sterling today does not need its support. It only comes to snatch a moneylenders' profit and then fly away again and in the mean- time it adds to the potential money supply. Why on earth does the Bank of England want to attract it?
The gilt-edged market was so convinced that Bank rate would have to be reduced last week that speculators rushed in to buy stock in millions at the 'short' end. As the Government needs to sell a lot of stock to the public this year to meet £1,380 million of redemptions falling due in the next nine Months you would think that a little specu- lation would be winked at—just to en- courage the public to buy and ride on a bull market. But what does the Bank do but discourage the bulls by suddenly issuing a new 'tap' of £600 million of 6+ per cent Treasury 1976, yielding at 94; a little over 7* per cent on the pretext that the short 'tap' (6 per cent 1974) had run out? Why is the Old Lady of Threadneedle Street always so beastly to her friends? Why does she always sit on any decent market rise?
I suspect that the old dear still suffers from the vapours at the thought of cutting Bank rate during an inflation. She cannot seriously believe that dear money can cure a wage-cost inflation—that myth has been exploded long ago—but she may still hold to the old convention that very dear money must always accompany very tight money. What a load of nonsense that is! The im- portant thing is to control the supply of money and if you can do that you can dictate its price. The rate of interest, its price, is always an artificial, manipulated thing. Modern welfare states can never tolerate a real or market rate of interest because if you were to allow desperately short com- panies to bid for money they would bid up to 20 per cent or 25 per cent, a rate which would kill housing and other essential social investments. Now the central bank can always control the supply of money. If the joint stock banks extend too much credit to their customers the Bank can call for extra 'special deposits' and stop the increase in their advances. What the Old Lady has got to get into her head is that a high Bank rate is cost-inflationary and because it adds heavily to budget costs—high taxation also being cost-inflationary—it has got to be reduced. The service of the national debt is now costing over £1,300 million a year. As we must save every penny in view of the coming decline in the revenue from tobacco, which brings in over £1,000 million a year, the top priority of Bank policy should be to reduce Bank rate.
This argument is reinforced by the need to reduce outgoings in interest on foreign debt which burden the balance of payments. Mr Harold Lever has called attention in The Banker to the expensive nature of our sterl- ing holdings overseas. We guaranteed the dollar exchange value of 90 per cent of these holdings under the Basle agreement of 1968. Since that date these holdings have grown by about £800 million to £2,300 million. It must cost about £150 million a year to service these debts. Instead of cutting down on foreign debt service what does the Bank of England do but relax the restrictions on borrowing foreign currency to finance private portfolio investment abroad! The new regulations, published just before Christmas, widen the classes of investors who can borrow abroad to include private individuals, allow the borrowings for any length of time against the previous five-year minimum, and exempt portfolio profits on the borrowed currency from the 25 per cent surrender of premium provided they are not converted back into sterling but are used for further investment. Has it not occurred to the Bank that in view of the widespread industrial unrest and mounting unemploy- ment it would have been wiser to ease the cost of investment at home instead of abroad? And the short way to do that is to reduce Bank rate. The present high cost of borrowing in the market-12 per cent upwards—has led to the virtual collapse of new industrial investment.
I hope that Mr Barber will give his sanc- tion to a cut in Bank rate this week. He has got to convince the trade unions somehow that he means to reduce the cost of living before he wins their support for wage re- straint and as he cannot immediately reduce indirect taxation the only way out is to reduce the cost of money which enters into the cost of everything. With War Loan yield- ing 9i• per cent British government credit is a disgrace to the western capitalist world. Surely Mr Heath will not allow it to de- teriorate more than it did under Mr Wilson.
Stop Press: Mr Barber has announced a new ban on companies' short-term borrow- ing of Euro-dollars to reduce the inflow of short-term foreign money. If this is an attempt to avoid bringing down Bank rate, it is a shameful and hopeless subterfuge. 1f he would only bring down Bank rate, this would be quite unnecessary.
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