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Dame Kate Barker warns slashing rates on Thursday could harm economy

  • 02/08/2016
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Dame Kate Barker warns slashing rates on Thursday could harm economy
A cut to interest rates in the current climate “might prove negative for the economy”, according to former Monetary Policy Committee member and economist Dame Kate Barker.

Writing for the Times, the author of the government’s 2003 independent review into UK housing supply, said that slashing the interest rate would not increase consumer spending or borrowing, but instead put a strain on banks’ profitability.

Barker explained that tighter margin pressure on banks combined with the fact that savings rates are already extremely low, means banks would be reluctant to push down rates for savers and borrowers further.

Barker (pictured), said: “There is also uncertainty about the behaviour of savers at such low interest rates: they may be reluctant to reduce the capital value of their savings. So savers may cut back their spending by more than the models predict at higher interest rates, and borrowers will not benefit.”

After the Bank of England defied expectations last month and held the bank base rate once again at 0.5%, the market is more expectant that the Bank’s MPC will move to cut interest rates this week. This is widely predicted to be a reduction of at least 0.25%.

Barker said that while it was not too early for the committee to take into consideration the economic impact of the Brexit vote, it was still unclear how large a shock the referendum result would create.

“My contention is rather that a cut in the present circumstances might prove negative for the economy.

“The economy is slowing — and the cry is for a confidence-boosting cut in Bank rate. But I fail to see why a policy move that will be bad for the economy should have the effect of increasing confidence in any case. The MPC will be thinking hard about whether and how to respond to the siren calls of ‘something must be done’,” she added.

In addition, the MPC should not be concerned about inflation, Barker said. CPI is likely to rise over the coming months due to upward pressure on import prices as a result of the dwindling value of sterling, she explained, but with growth slowing it was unlikely this would translate into an upward pressure on wages.

Barker added: “The MPC would be right to “look through” a short-term inflation pick-up — and, in any case, somewhat higher wage growth would not be unwelcome.”

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