“It was a wide-held view that a quarter per cent cut was expected. But in the minutes, if not seconds, leading up to the announcement, the market got it into its head that because the industrial production figures were so weak, there was a real chance the base rate reduction would be as much as half a per cent.
"There was an inevitable disappointment when the quarter came up – that’s why you had a fall in the equity market.
"We are beginning to see clearly a slowdown in world growth It’s possible that even in the UK and US, we could go down to growth rates of as little as 1.5 per cent. That’s not exactly a recession but it’s something that’s very close to a recession. I think what’s happening in the short term is we’re inching our way closer to a recession and that’s behind the general weakness in markets.
"With regards this quarter of a percent drop, if the bank wishes to lead you money, it’s a quarter of a per cent reduction in your charges. But there is a feeling that the banks are becoming more restrictive in making money available in the first place.
"The quarter of a percent cut is helpful but is the bank willing to lend you money” There is some doubt on that. For example, you see mortgage lending has declined dramatically, loans to businesses have declined and there is a feeling that the banks need to support their balance sheets.
"We will learn a lot more about that aspect at the end of the month when the banks tell us the amount of reserves they have to put aside for bad debts, and whether some of them will contemplate a cut in their dividends. Quite clearly, the markets would be terribly upset if that was to happen. This is another reason behind the nervousness that currently exists.
"Obviously we need lower interest rates. Of that there can be no doubt. I appreciate there is an inflationary danger but it’s a question of choosing between two evils – do you risk recession by not cutting interest rates, or do you risk higher inflation by cutting interest rates. It’s not an easy choice. If I was in the MPC’s place, I would tolerate higher inflation in the short term – because I believe it will be short term – and take the chance that wages are not going to roar ahead, therefore requiring much higher interest rates at some later period in time.
"A recession will send the government’s borrowing requirement dramatically higher. Somebody was suggesting that if the economy entered a recession, the chancellor would have to borrow £100b per year.
"I think the UK could get away with about 1.5 per cent growth. It’s on the border line but it is not an actual recession. The definition of a recession is two consecutive quarters of negative growth. I think we have the ability to escape from that. I hope we do. If we enter a recession, I would be scared about the housing market.
"The US is possibly more likely to go into recession but, it’s not quite obvious. However, I don’t foresee a 1930’s-type correction where the hole is going to collapse. There is going to be a sharp slow down.
"Like all periods in life, one goes through good times and difficult times. The difficult times are like winter. Winters are needed because the bugs get going and viruses are killed off and then we position ourselves slowly, but surely, to look ahead at a fresh period of expansion."
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