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Raising interest rates may be our final salvation

We had friends over last week for drinks and a good chat. It was a nice evening, lots of laughter and some informative asides from Dave, an engineering lecturer.

We’d been discussing the miracle Hudson River plane landing in New York and we digressed into how jet engines work. Inevitably, our conversation eventually turned to economics.

My husband, whose business is being hit hard by the fall in the pound against the dollar, expounded his theory that interest rates should now be raised, rather than dropped further.

Falls in the Bank of England base rate seem to have had a negligible effect on the mortgage market in that lenders still seem unwilling to lend to anyone other than perfect borrowers who need under 60% LTV, have no adverse credit history and only need 2 x joint income.

How can first-time buyers get on the ladder on that basis? So raising rates again, even by a relatively small amount, would probably also have a negligible effect, but could strengthen the pound again. This would enable us to import more cheaply, thus stimulating spending.

Savers, who have been bemoaning rate falls, could be heartened, but I guess unless savings rates get beyond inflation levels they remain net losers, and for those on low pension incomes reliant on savings returns, this could be some small solace.

I was then reading current affairs magazine The Week, in which the editor Jolyon Connell was pondering whether we should be saving our money or spending it in these tough times. He supported his argument for spending with some Keynesian theories regarding the paradox of thrift.

Saving in a recession is, argued John Maynard Keynes during the Great Depression in 1931, utterly harmful.

He urged patriotic housewives to go out into the wonderful sales, which were being held everywhere and to “lay in a stock of household linen, of sheets and blankets to satisfy all your needs. And you will have the added joy you are increasing employment”.

It is counter-intuitive for us to do that. It feels wrong to spend when we are under such economic stress. Our instincts tell us to batten down the hatches and resist all but necessary purchases.

I suppose that’s what banks and lenders have been doing – not lending to anyone they have any excuse not to lend to. But maybe they should reassess this stance and start to lend again.

So this week’s message is that we all have to start spending. Banks have to spend their money by lending it to borrowers, who in turn need to go out and spend it on property, home improvements and other items, thus stimulating the market, tradespeople and retailers.

With the pound strengthened against the dollar and euro, our goods will become cheaper, thus kick-starting sales still further. And all this starts with a rise in interest rates.

Controversial maybe, but radicalism may be our final salvation.

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