Is the economy grinding to a halt?

Published on The Sunday Times, by David Smith, June 8, 2008.

ALL the news fit to print about the economy is very gloomy. In a matter of weeks the credit crunch’s bite has got harder and evidence of a sharp slowdown tangible.

Add in blunt warnings from the Organisation for Economic Cooperation and Development, roughly suggesting Britain has been transformed from model economy into basket case, and it looks like the last rites …

… Economists at UBS, in a presentation last week, argued strongly that in advanced economies the downward risks to growth from the credit crunch far outweighed the upward dangers for inflation from rising food and commodity prices.

That is not the view of the European Central Bank, whose president, Jean-Claude Trichet, warned on Thursday that the ECB could be raising interest rates by a quarter-point to 4.25% next month. If that seems strange, perhaps we should be grateful for the fact that the Bank is merely content to keep its rate on hold at 5%, as it did last week.

Normally I would argue for a cut, but these are not normal times. A rate cut now would be wasted ammunition, costing credibility for little gain, particularly when set against the ECB’s hawkishness. Until the usual transmission mechanism for monetary policy is restored there is no point in the Bank doing anything.

P.S.: … (full text).

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