Short-term Interest Rates in Late 1952 to Mid-1954

Bank rate was reduced to 3½% on 17th September 1953, and the special rate for lending against Treasury bills was abolished. Cobbold proposed the change. His main reasons seem to have been that the March 1952 increase had done its job, so that the haemorrhaging of reserves had been stopped and the reserves had now been rising for some time; that interest rates in other countries were either falling or expected to fall; and that 4% was an abnormally high level of rates. Moreover the yield differential between commercial and Treasury bills that was entrenched by the agreed pattern of money market rates (Table 6.1) meant that sterling commercial bills were an uncompetitive vehicle for financing international trade, and the supply of commercial bills had fallen sharply after the 1952 rate hike.1 A modest reduction would bring the commercial bill market back to life.2 The rate at which the Bank lent against Treasury bills, which had been the effective ceiling for money market rates, was unchanged at 3½%, so it was not inevitable that Treasury bill rates would fall, but they did, by about ¼%, as did call money rates and deposit account rates (Figure A7, Table 6.1). The debate in the Bank that preceded the recommendation recognised some drawbacks of a rate cut — principally that it might over-stimulate domestic demand, which would be especially undesirable in the light of the Chancellor’s ‘obvious unwillingness to contemplate — let alone to carry out — real reductions in Budget expenditure’.3