The true interest rate that we are facing has been calculated in a Telegraph article. Whereas the nominal rate as decided by the Bank of England is 0.5%, based on a stated policy of deflation, the real rates are overwhlemingly negative:
JP Morgan's chief UK economist Malcolm Barr has calculated that every extra
£25bn in quantitative easing is equivalent to an around 0.6pc point cut in
interest rates.
"The MPC has decided to implement £125bn by the end of July, which suggests that QE announced thus far is equivalent to a reduction in rates of around 300bp, and the effective policy rate including QE, will be -2.5pc as the asset purchases are completed in late July, rather than 0.5pc," he said.
The calculation may come as a surprise to many families and businesses, which are still paying high interest rates on their new and existing loans. However, this is largely because the financial crisis and credit crunch have driven lenders to push their own rates higher as they attempt to rebuild their balance sheets.
From this calculation, the government and the Bank of England have colluded in pumping liquidity into the economy on the stated grounds of averting deflation. Labour have an additional political interest in softening the downturn so that they can take credit for 'saving the economy'. Liam Halligan has pointed out that there is little evidence of a deflationary threat:
But now, just three months later, this looming threat has apparently passed. It warrants not a mention in the Bank's Inflation Report. Has deflation really gone away? Or did we never actually face such dangers? Was the spectre of deflation conjured up, instead, for other reasons – as an excuse for this ghastly Government to yank monetary policy back off the Bank and nail interest rates to the floor, while junking fiscal caution and borrowing in a fashion more akin to a banana republic?
The Bank of England has stopped warning of deflation because it is no longer credible to do so. In truth, it never was. CPI inflation remains at 2.9pc – way above the Bank's target, as it has been for 31 of the last 33 months. As sterling has fallen, import prices have surged. In an open economy like the UK, that's highly inflationary.
This is an inflationary strategy that segues with Labour's political aims. An unsustainable short-term policy is undertaken to ensure electoral victory in May 2010. Stagflation, or its new severe coinage, slumpflation is now the key danger.
The combination of a huge budget deficit with quantitative easing also casts very strong doubt whether any growth caused by this liquidity is sustainable. Actually, it isn't. So, once the stimulus falls away or ceases under crisis conditions, we will enter the second dip.