OECD says UK rates must rise to 3.5 per cent in 2011

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THE OECD said yesterday that state indebtedness, and rapidly growing inflation is threatening to bring down the entire banking system.

Its secretary general, Angel Gurria, told a press conference that ‘correction’ of public finances was now vital in many countries.

Gurria described the explosive contradiction that is gripping bodies such as the OECD and all of the major capitalist governments.

He said ‘We have been accused of being a little schizophrenic.’

He was referring to the sharpening contradiction between the need to maintain spending to sustain the faltering ‘recovery’, at the same time as calling to stamp on government spending and indebtedness to prevent the biggest financial crash in the history of capitalism.

He said: ‘We are trying to do both things at the same time.’

Commenting on the conduct of the international financial oligarchy he said: ‘Markets go and attack immediately as they see signs of weakness. That is why these announcements that have been made (of action on public overspending) … are very important.’

The OECD says of the task facing the British government, that it must focus on cutting its record budget deficit of £156bn, despite the risk that the ‘savage cuts’ involved will smother the predicted faltering growth of the economy, expected to reach 1.5 per cent this year, and then 2.5 per cent in 2011.

The message is that ‘Exit from exceptional fiscal support must start now, or by 2011 at the latest.’

The report continued that the Bank of England must hike interest rates before the end of 2010 to combat the soaring inflation rate which hit 5.3 per cent on the RPI rate for April.

Interest rates have been at a historic low of 0.5 per cent since March 2009 after the Bank took drastic action to ease the impact of the slump.

The OECD says: ‘The authorities face the challenge of preserving credibility, with headline inflation and some measures of inflation expectations exceeding the targeted rate.’

Further: ‘The gradual drift up of some measures of inflation expectations implies a need to increase interest rates earlier than previously thought and no later than the last quarter of 2010.’

The current RPI inflation rate of 5.3 per cent is more than three times the average in the rest of Europe, which is 1.5 per cent.

Even the Bank of England governor Mervyn King wrote to the new Tory coalition Chancellor, George Osborne, to say that he hopes inflation will ‘fall back to target’ within a year, but added he is ‘very conscious that there are risks to inflation in both directions’.

The OECD while predicting the UK economy will grow 1.3 per cent this year and then 2.5 per cent next year also stated that ‘High inflation and lingering effects from the credit crunch, together with necessary fiscal tightening, will nevertheless keep growth subdued in 2010.’

It states that ‘A concrete and far-reaching consolidation plan needs to be announced up-front’. Also, ‘A weak fiscal position and the risk of significant increases in bond yields make further fiscal consolidation essential.’

However, wrestling with the contradiction, it warns the government to take care not to act too savagely, when the economy is still emerging from the worst recession in decades.

‘The fragile state of the economy should be weighed against the need to maintain credibility when deciding the initial pace of consolidation.’

The report concludes that the Bank must begin hiking up interest rates by the second half of this year and that interest rates must reach 3.5 per cent by the end of 2011. That is seven times the current rate.

Such a hike in interest rates will see hundreds of thousands of repossessions of mortgage holders who are unable to pay, at the same time as a growth of unemployment sets in as a result of a sharp decline in exports.

The crisis of capitalism cannot be resolved by any combination of ‘stimuli’ and savage cuts, or by one or the other policy.

To recover capitalism requires a vast destruction of the productive forces, through slump and then war.

The only way out of the crisis is through the organisation of socialist revolutions and the replacement of capitalism by socialism on a world scale.