Posted by WARREN MOSLER on October 28th, 2009
Earlier this year I thought the UK was on track with their understanding of their monetary system.
Recent headlines don’t look so promising:
By Robert Hutton and Jennifer Joan Lee
Oct. 28 (Bloomberg) — Philip Hammond, a lawmaker who speaks on Treasury policy for the Conservatives, said the opposition party wants the Bank of England to keep interest rates low and will cut the deficit to allow this to happen.
â€œIt is essential that in the recovery we are able to continue to keep monetary policy relatively loose,â€ Hammond said in an interview at Bloombergâ€™s office in London. â€œWe will only be able to do that if we have got the deficit under control.â€
The focus on monetary policy contrasts with Prime Minister Gordon Brownâ€™s argument that maintaining government spending is the best bring Britain out of the worst recession since World War II.
With an election due within seven months, the question of how and when to cut spending is at the heart of the debate between the ruling Labour Party and the opposition. Brown argues that maintaining spending and cutting taxes are the best ways to return to growth. The Conservatives say those steps risk lifting inflation and interest rates, choking off recovery.
â€œWhat has got Britain through the recession so far has been the activist monetary policy at the Bank of England, keeping interest rates low, supporting the economy through quantitative easing,â€ Hammond said. â€œWe will only be able to do that if we have sent a clear signal to the markets that we intend to execute a plan to get the deficit under control. We need to make a start in 2010.â€
â€˜Active Monetary Policyâ€™
Conservative leader David Cameron yesterday said he was â€œa great believer in an active monetary policy,â€ a step away from previous comments that the bankâ€™s quantitative easing program would have to end soon.
Cameron told journalists that a speech heâ€™d made at the start of the month had been misunderstood. â€œThe point I was making was about how easy or difficult to fund our debt, because the market for gilts hasnâ€™t really been tested yet, because of QE,â€ he said. He repeated his point that the intervention will have to end some time. â€œYou canâ€™t go on indefinitely.â€
Policy makers at the central bank will decide next week whether to extend their asset purchase program, which is pumping
175 bln pounds ($286 bln) in newly created money into the economy.
The program has increased demand for U.K. government bonds, known as gilts, as the Treasury sells a record 220 bln pounds of debt this year.
The Conservatives have repeatedly warned this year that Brownâ€™s spending plans are putting the U.K.â€™s AAA debt rating at risk. Hammondâ€™s boss, George Osborne, told an audience of financiers on Monday that it was only the likelihood of a Conservative victory at the next election that was keeping Britainâ€™s debt costs down. Conservatives have led Labour in polls for two years.