The dovish consensus is wrong: It is time for interest rate hikes

Allister Heath

ECONOMISTS seem to lurch from one dangerous fad to another. In the late 1980s, most supported the European exchange rate mechanism, which blew up spectacularly; in the 1990s, many supported UK membership of the euro, which would have been a disaster; during the 2000s, few saw the bubble coming and most missed the credit and liquidity explosion; and today almost all have decided that the Bank of England needs to keep interest rates at emergency levels for at least another 12-18 months, despite a resurgence in growth.

I’m being slightly unkind, of course: some economists didn’t fall in the various traps I outlined above, and the majority has often got some big calls right. But my point is that the consensus among policy-makers is often wrong. We are seeing another instance of this today. The Bank should be putting up rates now, in a gentle and gradual manner. The money supply is growing at a reasonable rate; nominal GDP is expanding nicely; employment is soaring; wages of some professions (including brickies and architects) are shooting up; there are already some skill shortages; and the current account deficit is huge, suggesting that aggregate demand is too large compared to supply. Monetary policy should be forward-looking: decisions today have an effect with long and variable lags, so waiting until there is a problem is always too late. Sure, the UK economy remains smaller than at peak; but that will change before the year is up. It is a mistake to look merely at the macro effect of interest rates: the impact on big aggregates such as consumer prices, output or employment. The micro effect also matters hugely – the allocation of credit, capital and labour between different companies and all the myriad decisions that make up an economy are being hugely distorted by artificially low official interest rates. The economy is normalising – monetary policy must follow suit.

We can sometimes become over-excited by emerging markets. They are the future, of course, but the market capitalisations of listed emerging market firms for the most part still pale in comparison with the West’s behemoths. China, of course, is a giant; but others are often quite small.

Michael Hartnett of Bank of America Merrill Lynch has crunched the numbers. The entire market capitalisation of all firms listed in Taiwan (using the number of shares readily available in the market) is $430bn, less than the US oil giant Exxon’s $433bn.

The total free market cap of all Brazilian firms is $393bn, roughly the same as Google’s $380bn. The market capitalisation of South African firms is worth just $276bn; that of Indian firms $234bn and Russians $225bn. By contrast, Apple is valued at $482.5bn – in other words, worth more than the free market cap of India and Russia put together. Facebook’s market cap ($145bn) is larger than that of all quoted Malaysian firms ($143bn); or larger than the Indonesian ($81bn) and Turkish ($57bn) markets put together.

The leading British firms also dominate entire emerging stock markets: Royal Dutch Shell is worth £142bn ($233bn), equal to all Indian free floating stocks, HSBC £133bn ($219bn) and Vodafone £114bn ($187.6bn). Emerging markets have expanded vertiginously over the past decade, and will grow and grow, but the West can still boast a decent number of very large firms.

It would be terribly wrong for Labour and Lib Dem peers to block the Wharton Bill for a 2017 referendum on EU membership in the House of Lords today. The bill has been passed by the Commons; it must now be ratified forthwith. The UK can’t keep ducking the debate forever. At some point, the public must decide once and for all where it stands; it is the Lords’ duty to give the people the right to choose.
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