Dated: 7 July 2011
In its latest monthly UK Economic Outlook the Institute of Directors (IoD) says there is no case for raising interest rates this year. Raising interest rates now, when broad money supply growth is so weak, would be unprecedented. At no time in the past 25 years have interest rates been raised when the broad money supply wasn’t experiencing double digit growth. Doing so now, when the broad money supply is flat at best, risks a double-dip recession.
The IoD says that despite the obvious short-term inflation problem, the performance of broad money is signalling a medium-term threat of deflation. Whilst nominal GDP is stronger than when quantitative easing was introduced, broad money performance is actually weaker. As a result, whilst there is not an immediate need for more quantitative easing (QE2), that time is drawing ever closer.
Graeme Leach, Chief Economist at the IoD said:
“At the present time there is much discussion about the need for a Plan B in fiscal policy. We think the opposite. The biggest threat to the economy comes from near zero growth in the money supply. Let’s not make the mistake of viewing money as irrelevant to the economic outlook. In the wake of the financial crisis it is central.”
To access the PDF of the IoD’s July UK Economic Outlook please click here: www.iod.com/pulsejuly11
