THE number of people whose homes have been repossessed for non-payment rose by 21 per cent last year, according to the authoritative Council of Mortgage lenders. Not only is this is the highest figure for repossessions since 1999, it occurred before the full impact of the global credit crunch and the slowdown expected in the British economy. All of which suggests that repossessions are likely to be even higher in 2008.
This is a stark warning that the Bank of England's interest rate cut on Thursday of only a quarter point is far too modest to have any decisive impact on the economic crisis. British interest rates are still too high at 5.25 per cent, as compared to
3.5 per cent in the United States and 4 per cent in the Eurozone. The ever-cautious Bank of England has always preferred to cut rates in small stages rather than make a decisive intervention in the markets, which is the favoured strategy of the Federal Reserve.
In the current ominous circumstances, the Bank of England should have cut rates by at least a half point. Already the markets are assuming the Bank will have to cut rates further during 2008, possibly nearer to 4 per cent. If that is indeed the Bank's logic, why not cut interest rates quickly and head off further problems with house repossessions?
The contrast between the indecisive response of the British authorities to the subprime crisis and the robust American approach can be seen in the £86 billion economic stimulus package agreed by both Republicans and Democrats, and passed by Congress this week. The package gives one-off tax rebates of up to £300 to individuals and £600 to couples, plus £150 for each child in the family. Those on low incomes, who do not pay income tax, get a government cheque for £150. The aim is to boost consumer spending.
One does not have to agree with the precise details of the US package to admire the fact the entire US political establishment plus the Federal Reserve are committed to being proactive in heading off a recession. In contrast, the British government and the Bank of England remain reactive.
The British authorities justify their caution by citing the need to contain inflationary pressures in the economy – there was news this week that wage settlements in the UK are getting bigger. However, the risk of an economic downturn in Britain now outweighs the risk from inflation. It is time for the government and the Bank of England to stop sitting on the economic fence.
The White House has asked the EU and Japan to boost spending as part of a global economic stimulus. Britain, Germany and Japan have rejected these overtures. Yet Japan is on the brink of recession, German export growth has started to stall and the UK housing market is in trouble. If we do not want to see home repossessions rise again in 2008, the UK government and the Bank of England need to think again.
The full article contains 513 words and appears in The Scotsman newspaper.
