By Ros Altmann, January 14, 2009
The latest interest rate reductions will not stimulate the economy — they may make things worse.
First, such dramatic cuts undermine confidence. When policymakers panic, people reduce spending and retrench, fearing worse to come.
Secondly, monetary policy operates with a lag. A weakening economy does not necessarily demand further rate cuts. If patients fail to recover quickly, the sensible doctor either gives the medicine time to work or changes the treatment, rather than desperately doubling the dose. An overdose could be worse than no action — it could even prove fatal.