From The FT:
Reasons to scrap Bank base rate in favour of Libor
Sir, The Bank of England base rate does not appear to be connected to anything. It is decoupled, we are told, from UK Treasury influence, it does not seem to be reflected in high street bank borrowing and lending prices, nor does it appear to be correlated with the wholesale London interbank offered rate (Libor). Sometimes it is above Libor and sometimes below.
The Bank rate is set by the wise men who meet regularly at the Bank for tea and biscuits and a bit of crystal-ball gazing, whereas Libor is determined by the discipline of market forces. I am not an economist and this suggestion may be totally naive, but why not scrap the Bank rate and use Libor to determine retail and corporate borrowing and lending rates?
For borrowers the banks could charge Libor plus a risk and administration premium. For lenders [i.e. depositors] they could offer Libor minus an administration premium.
Peter Bennett, Amersham, Bucks.
Exactly. The UK gave up on the idea of fixed exchange rates back in the 1970s (with a brief lapse during the ERM debacle) and scrapped exchange control restrictions in 1979 to no ill effect. Does anybody seriously think that we'd be better off if nine wise men and women met for tea and biscuits once a month to fix the value of sterling against dozens of other currencies?
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3 comments:
Surely the BoE base rate is just the lender of last resort rate? If so it already has little or no effect on commercial rates as most of those are set by market forces (and the power of the UK retail banking cartel) anyway. It is just a price signal from government as to what it is prepared to lend at. As such it can be used to regulate liquidity. But this should also be tied up with the creation of money in the broadest sense. If the governemnt makes more of the stuff as well as cutting rates the signal is that they want banks to lend more to customers. The opposite would mean less lending. And as lending is the creation of credit that would also expand the money supply.
There are other ways to regulate bank liquidity, increasing the capital requirements, the special deposit of the '70's beloved on lefty idiots etc etc.
On another topic (that I have also asked on Guido), please will someone explain to me the logical inconsistency of the phrase 'unfunded tax cuts'. How can you 'unfund' revenue?
Lender of last resort rate = base rate plus premium (usually 1%).
"Unfunded tax cut" is jargon for one not matched by a spending cut or a tax increase elsewhere.
" "Unfunded tax cut" is jargon for one not matched by a spending cut or a tax increase elsewhere."
...humph. Still seems like more Newspeak to me.
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