Handing out the candy

These days, there is something ritualistic about the MPC's monthly rate decision.

The ritual starts with the breakfast shows, who pull in a few economists from the city banks, and ask whether rates will be cut. The economists say no, pointing out that inflation is too high. The reporters follow up with "if not now, then when". Disappointment levels are directly related to the suggested length of time before the next rate reduction. Sensing the disappointment, the eager economist reassures the reporter. "Don't worry, we will see lower interest rates soon.

The day finishes off with something similar. There is an ex-post one minute spot on the evening news. Reporters lament the lack of a cut, while the economists offer empathy and the happy prospect that the rate cut drought will soon end, "just as soon as inflation starts to come down".

The underlying assumption is always the same - rate cut good, rate hike bad. TV commentators are like children standing around the playground debating whether mum will buy some sweeties on the way home from school. Like children, who are never too keen on discussing issues such as dental care and calorific intake, the media are reluctant to seriously discuss the implications of a few more years of cheap money. The immediate satisfaction of eating something sweet and sticky is all.

The blind faith in rate cuts is troubling. Does anyone really believe that a brace of 25 basis point cuts will hold off a recession? What exactly would drive this recovery? Presumably, lower rates cut mortgage repayments bills. People go out and spend their savings, keeping UK firms in business. It also encourages consumers to pull out the plastic. As demand increases, firms take advantage of lower rates to increase investment.

Where does the huge levels of personal debt fit into this story? Here we come to a rarely considered implication of more rate cuts, centred around wage stagnation and debt. The rate cut gang think that wage pressures are muted. There is some evidence to support this view. Wages, adjusted for inflation, are falling. Most of the recent inflationary pressure has come from commodity prices, rather than inflationary wage demands.

However, if wages are falling, it is hard to see how spending is going to pick up, unless you think that lower rates increase consumer borrowing. More consumer debt; it is heavy price to pay for a rate induced recovery.

In the post credit crunch world, things really are different this time. Rate cuts are no longer the cheap and cheerful route to prosperity. The MPC has already reduced rates twice in the last year; the economy continued to slow; sterling crashed; and inflation picked up. The cuts didn't stop house prices from falling or loan default rates from rising. It is hard thing to accept, but lower rates will not pull the UK economy out of trouble.