The unkindest cut: the BoE got it wrong

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Below is a link to an article I wrote about the Bank of England’s aggressive 1.5% interest rate cut that appeared in yesterday’s Guardian newspaper.

The unkindest cut, Guardian

The long and short of it is that I am very skeptical about the need for such a large cut. Many pundits felt the BoE was behind the curve and needed to send a large signal. One such figure is Willem Buiter, a former BoE Monetary Policy Committee member. However, to my mind, the move has the faint whiff of panic to it.

Moreover, while interest rate policy can be beneficial in stimulating demand, it is a blunt instrument, carrying large unintended consequences. Just ask Alan Greenspan. If the UK authorities want to stimulate demand, a smaller cut coupled with increased government spending on infrastructure is preferable to such a massive move.

The ECB demonstrated again that it is more cautious and more prudent by only moving 50 basis points on the same day.

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