Monetary Policy Committee member Paul Tucker has been talking foreign exchange during the Treasury Select Committee, remarking that it would be foolish to engage in a currency war. Tucker dismissed activism as foolish, saying that we must avoid slipping back into protectionism, must avoid balkanisation in global finance and beggar-thy-neighbour policies generally.
However Tucker has gone on to say that as a matter of analysis, sterling is too strong. He then went on to discuss the idea of the Bank of England setting negative interest rates. Sterling has tanked in reaction:
(Source: Yahoo! Finance)
Allister Heath has explained why a move towards negative rates would be unpopular:
Capitalism can’t work properly with state-imposed negative real interest rates. The only age group which supports low rates – and 36 per cent to 21 per cent is hardly an emphatic endorsement – are 25-39 year olds, who have lots of debt and big mortgages. Tory voters especially hate low interest rates. The public also dislike inflation far more than the political classes usually understand.
The consequent inflation would reduce living standards, punishing lower earners with higher living costs and stripping the middle classes of their savings.