Rising Bank Rate

Press, Volume CVI, Issue 31115, 19 July 1966, Page 16

Rising Bank Rate

Recourse to a Bank Rate as high as 7 per cent is clear evidence of the seriousness with which the British Government it taking its responsibility to protect sterling. Normally, the second quarter is particularly favourable in Britain’s trading year. This year it has had to bear the brunt of the seamen's strike, exceptionally high costs of copper, and devaluation of the Indian rupee. Unfavourable inward and outward trade figures have again encouraged speculation in sterling. The use of Bank Rate in Britain as an instrument of monetary policy is usually Intended to have two main effects; one on the rate of Investment and capital expenditure; the other on the attraction of short-term funds from overseas lenders. Though the first effect will not fail to be felt, the second is no doubt the one the British Government Is seeking.

If short-term interest rates are higher in Britain than in other countries, overseas lenders will tend to transfer funds to Britain. Thus the authorities will hope that the outflow of funds will be reversed and that speculators’ money will return to Britain. The rise in the Bank Rate to 7 per cent had an immediate effect on exchange quotations, the strengthening of sterling implying that speculators saw in the Government’s action renewed assurance that devaluation was not contemplated. Already it has been conjectured that in the customary autumn trade doldrums there will be further rises in the Bank Rate, to 8 or even to 9 per cent.

The long-term answer to Britain’s financial problems must be found not in such expedients as manoeuvres with the Bank Rate but in a strong sterling based on a satisfactory balance of payments. It is questionable whether this objective will be brought nearer by an expedient designed chiefly to contain a threat to sterling’s parity in the immediate future. An upward adjustment in the entire structure of interest rates in Britain will stiffen hire purchase terms, thus affecting the sale of consumer goods and those who make and supply them, and increase mortgage interest, with a constraining effect on the building programme and all associated with it. But will this have the effect of increasing productivity, upon which a sound balance of payments must chiefly rely? Britain’s economy in the last two decades has been too bedevilled by frequent “ stops ” and *’ starts ”. These have not always been the consequence of internal weakness; because of sterling’s function as an international currency, external events have often produced conditions that called for drastic action to be taken at home. Whatever the cause, a “ stop ” imposes strains which hamper the economy long after it is practicable to “ start ” again. Signs are not wanting that the British economy is heading for a prolonged "stop Countries, such as New Zealand, anxious to raise money on the London market may find that the rise in the Bank Rate will make loans prohibitively expensive. Even so, they will find some consolation in the thought that these Draconian measures will protect their balances held in sterling in London, as well as the security of the British economy. And this, after all. is the interest of the whole sterling area, not of Britain alone.