I'm confused. What were the MPC trying to achieve by their dramatic 1.5 percent rate cut?
Today's press release was a dreadful concoction of confusion and panic. Take, for example, inflation. On the one hand, the statement said that "The past two months have seen a substantial downward shift in the prospects for inflation in the United Kingdom."
A few paragraphs later, we find out that "CPI inflation rose to 5.2% in September." - which was a 16 year high. However, the MPC reassured us that declining food and fuel prices would sort the problem out. As for the collapse of sterling, which has pushed up import prices, again, the message was don't worry.
The MPC calling "mission accomplished" on inflation. Despite the headline inflation rate, the MPC now thinks that there is a substantial risk of inflation overshooting the two percent target. Well, we will see about that.
Growth is now the main objective for the MPC. The credit crunch has done a number on consumption, investment is sliding and it all adds up to a recession. Hence, our rapidly deteriorating economy needs a big number rate cut to save it from disaster. The MPC weren't afraid of bigging it up; they went for a 1.5 percent cut.
What of the banking crisis? Again, we had mixed signals. On the one hand, the MPC reverted to hyperbole, describing the crisis as the worst in a century. On the other hand, they reassured us that recent initiatives were working and that things were improving.
Nevertheless, the MPC warned that credit markets were likely to be restricted for consumers and businesses for some time to come. This begs the question, how would today's cuts, which made the official rate, negative in real terms, help stabilise credit markets. After all, negative rates destroys any incentive to save, and limits the ability of banks to build up household deposits as a healthy alternative to structured finance.
These dramatic gestures often do more harm than good. Rather than reassuring people, big rate cuts send a signal that things are much worse than feared. Unsurprisingly, the FTSE fell almost 6 percent.
Today's cut smacks of panic and confusion. It won't save the economy from recession, it won't help stabilise credit markets and it won't help the MPC meet their inflation target.