Rates 'must rise to help recovery'21 March 2011
Economic recovery in the UK must involve allowing interest rates to rise, a free market think-tank has said.
In a report ahead of Wednesday's Budget, Reform said the root cause of imbalances in the economy, including the financial bubble, was "excessively loose" monetary policy over the past decade, which allowed consumers and businesses to borrow on the cheap.
The report's authors, including former Downing Street economic adviser Derek Scott, said the Budget should deliver "more capitalism, not less" by introducing a range of market-friendly policies to help increase the rate of return on investment.
These would include reducing the state deficit, moving to lower marginal tax rates and reforming the public sector to allow services to be delivered more cheaply. This would allow investors to continue to make a profit with higher interest rates.
Mr Scott warned the Chancellor that using the Budget to "cut the City down to size" would not be a sensible basis for economic policy.
He dismissed the notion that ministers or regulators can determine the right size for the financial sector as "fanciful and dangerous" and said a Government-devised agenda for growth was unlikely to be successful.
Mr Scott said: "The widespread concern of policy makers to rebalance the economy may be understandable, but is only a secondary target for policy. These imbalances are the symptom of the problem rather than the cause.
"A central cause was the excessively loose monetary policy in the last decade most notably on the part of the (US) Federal Reserve and, for different reasons, as a result of European Monetary Union.
"This created inter-temporal imbalances and putting this right will entail at some stage higher interest rates in the UK.
"The financial sector did grow too large but that is because there was a financial sector credit bubble... and the notion that anyone, including financial regulators, has any accurate notion of the 'right' size of the sector is fanciful and dangerous. 'Cutting the City down to size' is not a sensible prescription for policy."