Tuesday, June 28, 2005

Low interest rates can point to deep-rooted weaknesses

But, if UK rates have peaked at 4.75 per cent, and fall back to the previous trough of 3.5, the average level of base rates will have been a lot lower than nominal growth. A lot of economists, brought up on the tough monetary medicine of the 1980s, would be tempted to argue this is simply not possible: surely, they would argue, interest rates at these "accommodating" levels will only, in time, lead to inflation.

This argument is in danger of confusing cause and effect. Low interest rates are not the cause of high inflation; they are a consequence of low inflation and, for that matter, low inflationary expectations.