Britain: A Belt Tightener

Gathering for their regular Thursday morning meeting, directors of the Bank of England last week made a decision that has been expected on Threadneedle Street as well as Wall Street. Faced with a continuing economic crisis and with a shaky pound sterling that slipped at one point to its lowest value in 20 months, the directors raised the bank rate—the interest that other banks must pay to borrow from Britain's central bank. The rate was increased from 6% to 7%, a level it last reached during the sterling crisis of November 1964. Thus Britain became the sixth European nation to raise its discount rate in the past ten weeks; the British rate, moreover, is now the highest of all.

Along with the Bank of England's action, the government, in another step to take money out of circulation, ordered commercial banks to double the special deposits or reserves they must hold with the Bank of England. This meant that another $280 million would go into reserve; the move, along with the higher bank rate, had an almost instantaneous effect on the British economy. Bankers hiked interest rates on business loans to as much as 8%, a figure to frighten away many a businessman looking for money. A sharp drop is anticipated in installment buying. Homeowners, whose mortgage rates go up and down with the bank rate, now face increases in their mortgage payment. The total effect will be a belt tightener for England, whose foreign trade balance sagged another $295 million in June because of the 45-day seamen's strike that tied up British vessels.

The Bank of England's action will provide short-term relief for the pound by attracting back to English banks some of the money that has been siphoned off owing to more attractive interest rates elsewhere and uncertainty over the pound. But in the House of Commons, Prime Minister Harold Wilson hinted that for the long term further austerity measures may be necessary.