Britain brakes falling interest rate

Thatcherite economic policy - reduced government spending to lower inflation - has had to take a step backward in recent days, Monitor correspondent David K. Willis reports. The big question is whether the step is temporary - or whether more are needed. The step backward was the sudden decision to raise bank interest rates here after a period of steady decline.

Prime Minister Margaret Thatcher's monetarism has worked almost too well in one way: Interest rates have fallen quickly, and big investors were shifting out of sterling into other currencies. The result was a 5.6 percent drop in the value of the pound in just two weeks. The slide was accelerated by prospects that Britain's balance-of-payments surplus could disappear completely next year, since British industry remains uncompetitive in many areas.

There is one silver lining: A cheaper pound means Britain's exports are more competitive. One treasury estimate is that it will boost output by (STR)1.3 billion in l984 and take 70,000 people off the unemployment rolls.

But the clouds of rising costs began to look blacker. Britain depends on foreign trade far more than the US does, and imports are more expensive now. The same treasury estimate is that the fall in the pound means one-half of 1 percent on prices next year but 1.3 percent in 1984.

The prime minister and the Bank of England began to worry about the long-term effects of these costs on their entire economic strategy, so much so that they switched course and signaled banks to push lending rates up. Treasury officials are saying that interest rates may fluctuate more rapidly now. They hope that the pound now will stabilize. If it does not, interest rates may have to go even higher, despite government hopes that that won't be necessary.