Editorial

Interest rate cut will bring no reprieve

FOLLOWING THE interest rate cut on 6 December by the Bank of England monetary policy committee (MPC) the discussion in the financial pages of the press reflects continued fears that the current downturn in the economy could lead to a recession. 2008 could be the toughest year for the British economy for a long time. It will not be the top city financiers who suffer, but ordinary working-class people.

The monetary policy committee was expected to keep interest rates at 5.75% but at the last minute was shunted into a quarter percent cut after looking at weak economic data. There was slower economic growth in the three months to November.

Growth next year is predicted to fall to 1.5% compared to 3% this year, with further interest rate cuts predicted. This financial crisis is hitting the British economy harder than others as the financial sector plays such a key role. While manufacturing industry has been decimated, the financial sector was responsible for 30% of GDP over the last three years.

The Northern Rock crisis caused by the global credit crunch is no longer a one-off problem; many banks are having problems borrowing money. This has fed through into the 'real' economy of retail sales, mortgages, house prices and debts.

As the socialist has explained over a period of time, the economic upturn had begun to fizzle out some years ago and was only kept afloat by cheap credit. Now the cheap credit is ending, to reveal an economy with significant problems. We were all encouraged to use credit as this enabled people to spend beyond their immediate income thereby keeping an already troubled economy going longer.

The credit crunch has not gone away; the inter-bank borrowing rate has increased to 6.5% making it difficult for banks and building societies to borrow money from each other to balance their books. This has impacted on a housing market which has been overvalued for some years. Successive interest rate rises (five since August 2006) were implemented to slow down the housing bubble.

House prices

Recent reports reveal the lowest number of new approved mortgages for two years and house prices falling for three months in a row. Homeowners have taken out loans based on their properties which, added to credit card and other debts, has led to people spending much more than they save and to many spending more than they earn.

Repossessions have reached a 15-year high and are set to increase further. On the one hand economists understand that housing is overvalued and needs to deflate, but they also realise that people need to continue spending.

Only days before the interest rate cut, it was expected that the MPC would leave interest rates on hold to counteract inflationary pressures fuelled by higher prices. The price of oil has rocketed. Food prices have increased and gas bills are set to rise by 15% next year to reflect higher wholesale prices. A lower value of the pound (one effect of the interest rate cut) will have the inflationary effect of higher import prices.

However, inflation usually occurs in a period of rapid growth. To be present as an economy slows is known as 'stagflation': rising prices and falling production. The Bank of England cut interest rates to attempt to slow down the fall in the economy but lower rates could boost inflation further.

Capitalism is an unplanned economic system which lurches from upturns to recessions and vice versa. All that government and central bank policies can do is attempt to slow down a fall in the economy or encourage spending to prolong an upturn. Adjusting interest rates or injecting money into the economy can only succeed for a while, if at all. A budget deficit heading for £40 billion next year will not allow the option of using public funds to offset the slowdown and will impact on government spending, adding to New Labour's problems.

A socialist society would eliminate the boom and bust cycles of capitalism by ensuring that the major companies are publicly owned and that the economy is planned under democratic control, with the profit motive replaced by production on the basis of need.

The majority pay

WHILE THE Modiva nightclub in London launches the world's most expensive Christmas cocktail at £35,000 a glass, most people will be worrying about the effect of the current economic forecast on their lives.

Higher costs of food, petrol and other goods are already impacting on people's income and train fares are set to rise above inflation next year. Homeowners are not even certain to feel any benefit from the interest rate cut as many banks and building societies will not be passing on all or any of it to mortgage payers as they need the extra money themselves. This will inevitably lead to more people losing their homes through no longer being able to keep up their mortgage payments.

Many workers, particularly in the public sector, have in effect had a wage cut this year as most pay rises were below inflation. They are likely to face similar or worse deals next year as the government intends to continue keeping public-sector wage increases very low.

In addition, private sector bosses will want to ensure that workers' wages rather than their profits suffer when production and sales decrease. An economic slowdown will also inevitably lead to job cuts.

The millionaires and billionaires who defend the capitalist economy have enough wealth to protect their living standards during an economic slowdown.

However, while the government pumped billions of pounds into Northern Rock, they will not be willing to protect ordinary people from the approaching crisis.

Working-class people will need to organise and struggle against the inevitable attacks on their jobs, pay and conditions as the economy falters.

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In The Socialist 13 December 2007:

Scotland

Defend Tommy Sheridan: End Murdoch's witch-hunt