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Is it time to ditch Gordon Brown’s interest rate policy?

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08/03/2024

Is it time to ditch Gordon Brown’s interest rate policy?

Nearly 27 years after Gordon Brown’s infamous letters to the Governor of the Bank of England imposing the UK’s rate setting policy, the current edition of ‘INTEREST’ questions whether it is time to rewrite this policy.

‘INTEREST’ reflects that the two letters are almost entirely focussed on controlling retail inflation, with little or no mention of other benchmarks. As a result, UK economic policy since Gordon’s letters has focussed specifically on inflation and everything else has been side lined, if not totally ignored. It is clear that this regime has not put an “end to boom and bust”.

 

Is it time to ditch Gordon Brown’s interest rate policy?

Nearly 27 years after Gordon Brown’s infamous letters to the Governor of the Bank of England imposing the UK’s rate setting policy, the current edition of ‘INTEREST’ questions whether it is time to rewrite this policy.

‘INTEREST’ reflects that the two letters are almost entirely focussed on controlling retail inflation, with little or no mention of other benchmarks. As a result, UK economic policy since Gordon’s letters has focussed specifically on inflation and everything else has been side lined, if not totally ignored. It is clear that this regime has not put an “end to boom and bust”.

 

'INTEREST’ further identifies a number of other flaws in the “framework” set out in Brown’s two letters:

 

  • The First was to set only one target or objective – inflation – and ignore all the other possible benchmarks – exchange rates, unemployment, GDP, capital inflation all of which featured prominently in the policies of previous Governments.
  • The Second was the over complicated bureaucracy, imposed on the MPC, down to what letters should be sent, and when, if targets were missed.  But there was virtually no mention of how they should go about rate setting which is what they were there for.
  • The Third is that it was a mistake to make CPI the measure of inflation.  To put it in simple terms, CPI merely measures consumer retail inflation whilst RPI also covers consumer capital inflation (i.e. house prices and mortgage interest rates).  Whilst there are arguments for and against both indices it is of note that most, if not all, of the slumps of the past 70 years have been, at least partially caused by uncontrolled house price inflation such as has happened recently.
  • The Fourth is that the proof of the pudding is in the eating.  Whatever the reasons the current rate setting regime has not achieved its objective of eradicating boom and bust.  We have given Gordon’s policy 25 years and it’s time to change.

'INTEREST’ further identifies a number of other flaws in the “framework” set out in Brown’s two letters:

 

  • The First was to set only one target or objective – inflation – and ignore all the other possible benchmarks – exchange rates, unemployment, GDP, capital inflation all of which featured prominently in the policies of previous Governments.
  • The Second was the over complicated bureaucracy, imposed on the MPC, down to what letters should be sent, and when, if targets were missed.  But there was virtually no mention of how they should go about rate setting which is what they were there for.
  • The Third is that it was a mistake to make CPI the measure of inflation.  To put it in simple terms, CPI merely measures consumer retail inflation whilst RPI also covers consumer capital inflation (i.e. house prices and mortgage interest rates).  Whilst there are arguments for and against both indices it is of note that most, if not all, of the slumps of the past 70 years have been, at least partially caused by uncontrolled house price inflation such as has happened recently.
  • The Fourth is that the proof of the pudding is in the eating.  Whatever the reasons the current rate setting regime has not achieved its objective of eradicating boom and bust.  We have given Gordon’s policy 25 years and it’s time to change.

 

‘INTEREST’ is dispatched in advance of meetings of The Bank of England’s Monetary Policy Committee and is distributed free of charge. To receive the latest issue and sign up please visit: https://www.moneyfactsgroup.co.uk/magazines-and-reports/interest/

 

 

‘INTEREST’ is dispatched in advance of meetings of The Bank of England’s Monetary Policy Committee and is distributed free of charge. To receive the latest issue and sign up please visit: https://www.moneyfactsgroup.co.uk/magazines-and-reports/interest/

 

Notes to editors

Pioneering financial comparison technology for over 35 years.

Moneyfacts Group plc is the UK’s leading provider of retail financial product data. Used by virtually every bank and building society in the UK, and supplied to the Bank of England, Financial Conduct Authority, Financial Ombudsman Service, HM Treasury, Prudential Regulatory Authority and UK Finance.

Our expert research team monitors the thousands of mortgages, savings, credit card, personal loan, business banking, life, pension and investment products in the UK.

Moneyfacts is the UK's leading independent provider of finance product data. For over 35 years Moneyfacts' information has been a key driver behind personal finance product decisions.

For more information about us please see our key facts.

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Our broadcast suite enables our finance experts to appear in-vision for television, and we regularly comment live on national and regional radio.

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Notes to editors

Pioneering financial comparison technology for over 35 years.

Moneyfacts Group plc is the UK’s leading provider of retail financial product data. Used by virtually every bank and building society in the UK, and supplied to the Bank of England, Financial Conduct Authority, Financial Ombudsman Service, HM Treasury, Prudential Regulatory Authority and UK Finance.

Our expert research team monitors the thousands of mortgages, savings, credit card, personal loan, business banking, life, pension and investment products in the UK.

Moneyfacts is the UK's leading independent provider of finance product data. For over 35 years Moneyfacts' information has been a key driver behind personal finance product decisions.

For more information about us please see our key facts.

Broadcast

Our broadcast suite enables our finance experts to appear in-vision for television, and we regularly comment live on national and regional radio.

To arrange an interview for radio or television, please contact our press department. We have an in-house broadcast room.

 

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Rachel Springall Press Officer / Finance Expert
Caitlyn Eastell Apprentice Press & PR Assistant