There should be no shame in admitting that the latest decision of the new Monetary Policy Committee to lower interest rates by 50 basis points is a form of experimentation.

Indeed Central banks such as the Federal Reserve, the Bank of England or the European Central Bank do not shy away from applying such a description to their decisions regarding the cost of money in the prevailing economic landscape. The potential impact of changes in the repo rates on national or regional economic activity is no longer as straightforward as traditional economic theory would lead us to believe. The jury is still out regarding how effective monetary policy can be in national economies beset by structural problems locally as well as globally. As a matter of fact this does not only apply to monetary policy as the debate now raging in the United States about the appropriateness of Quantitative Easing 3 effectively demonstrates.

Analysts as well as the newly appointed MPC would do well to view the decision to lower rates by 50 basis points with the eyes of laboratory researchers studying the impact of a change in one variable on their subject of study. Of course a national economy is not a laboratory but I am told that we now have sophisticated econometric models which can be used to isolate this variable and reach some conclusive evidence. As far as the general public are concerned they might be more interested in even a crude form of evidence that the sacrifices which they are being called upon to bear in terms of their reduced interest on savings and deposits or higher prices of goods at the supermarket is duly compensated by substantial increases in exports and employment. An interesting tool which could be applied to measure where we are some months down the line would be to apply the “misery index” to the national economy. The misery index for the uninitiated is simply the addition of the rate of employment to the rate of inflation. In this case the bet is simply that the induced increase in inflation would be fully compensated by the fall in the rate of unemployment caused by increased investments and acceleration in exports resulting from the fall in the cost of money.

As an aside it would be opportune to point out here that the most vocal lobbyists for bringing down the rates of interest are more or less the same ones who equally vocally clamour for “targeting” of social benefits, which in their view are too generously provided under a “dépassé” welfare state. May be they would care to let us know their views about whether it is fair that a reduction in interest rates should apply equally to a manufacturing concern employing hundreds of workers and someone who has taken a loan for building, let’s say a “résidence secondaire au bord de la mer”.

To come back to the last decision of the MPC, it is clear that taking a dogmatic view resisting a reduction in interest rates as a matter of principle can bring no good. Consideration needs to be given to macroeconomic data and prevailing conditions including the “mood” in the country at large. There is however a strong sense that in the prevailing circumstances, a lesser reduction in the rates would have been more than enough to send the right signal to all stakeholders while mitigating the cost to the weakest sections of society. For it is becoming abundantly clear that monetary policy in these days of turmoil is more about signals than about anything else. The examples of Japan as well as other OECD countries struggling with recession in spite of a cost of money near to zero is ample demonstration that these are not “normal” times.