Friday, February 6, 2009
Somewhat counter intuitive
This article proposes that perversely, when the BoE was raising rates the supply of credit increased. Due to exising near-zero rates in Japan, hot money as part of the carry trade moved into the UK, and more interest rates went up, the more funds flowed into sterling, cheapening imports and providing excessive capital for the banks (to hang themselves with). This is the idea that although we had a growing trade deficit, the money always flowed back in. So actually the restriction on credit now, is weirdly enough, because low interest rates in the UK cause capital flight. There is no conclusion in the article, but you could argue that to increase credit availability in the UK, we would need to raise rates again to become internationally competitive for capital.