Cutting interest rates would be a ‘good place to start’ – ITEM Club responds to IMF report

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Andrew Goodwin, senior economic advisor to the EY ITEM Club, responds to today’s report from the IMF.

“Central banks have already saved the day, yet again, with their response to the escalation of the Eurozone crisis in late-2011. But as we move into a new phase of the crisis they must stand ready to do whatever is necessary to stand behind the global economy.

“Cutting interest rates from 0.5% would certainly be a good place to start – the Fed’s target range is 0-0.25% and we have always said that ours should be the same. It won’t be the solution on its own, but would certainly send out the right signal. The jury is still out as to whether more QE would be a good move were the crisis to escalate. Gilt yields are already very low and, given the degree of uncertainty, there is no guarantee that asset prices would respond. In that situation the Bank might be better revisiting some of the policies it adopted in 2008/09 and offering more direct support to reduce the borrowing costs of the banking sector and to boost liquidity.

“Any fiscal package would have to be very carefully handled to maintain the confidence of financial markets. More spending on infrastructure projects would be a good idea, with faster rollout of high-speed broadband, the smart grid and the revival of projects for Carbon Capture and nuclear power all looking attractive prospects. However, these large projects are rarely ‘shovel ready’ and the benefits of such schemes will take some time to materialise.
“The experience of the 1930s tells us that policies to support the housing market can be a powerful tool for encouraging economic growth and employment. An important consideration in today’s open trading system is that the leakage of demand into imports is much less than for other forms of spending.
“There is also a strong argument for targeted measures to support the labour market, particularly given the reliance on the private sector to create jobs with the public sector cutting back.”