Tuesday, 14 December 2010

Crossing fingers the Bank of England is right on inflation

The Bank of England lost its reputation for infallibility long ago. Even before it was party to the near collapse of the UK banking system - along with the more culpable Treasury and Financial Services Authority - its forecasting ability had been called into doubt.
The founding remit of the Bank’s Monetary Policy Committee in 1997 was taming inflation when the incoming Labour government gave the MPC control over the setting of interest rates. Hindsight has shown this to have been a mistake; economic growth targets should have been incorporated into the ground rules.
Effectively this is what we have now. The MPC has turned a blind eye to rising inflation preferring to leave interest rates nailed to the floor at 0.5 per cent, while the British economy is still in intensive care.
The Bank’s increasingly controversial governor Mervyn King (pictured) argues that although inflation has been above target for a year, its continuing rise – assisted by the hike in taxes and commodity prices - will peak in 2011 and fall rapidly thereafter.
The worry is that the MPC has consistently failed to call the top correctly. Indeed the recovery in growth is so fragile that the Bank may still be forced to follow the US lead and print more money – itself an inflationary procedure.
There will be increasing calls in financial markets for the Bank to re-affirm its anti-inflation credentials and raise the cost of money. British savers won’t be complaining but home owners and business will.
A modest rise of, say, 0.25 per cent in interest rates would pacify the critics and reinforce Britain’s favourable position in bond markets. But the psychological damage at home could be immense. A hike – however small – just as the Coalition is in the middle of its slash and burn attack on the deficit could magnify the damage to confidence.
The squeeze is going to be bad enough as we try and avoid the fate of Ireland and Greece without business and consumers tightening purse-strings more than they might fearing a round of interest rate hikes once the MPC changes tack.

5 comments:

  1. Things are getting a bit difficult GC, says Jaffa. I note that the RPI is around 4.7 % and climbing, with another fuel surcharge and VAT rise still to come,in the New Year. The national future is beginning to look grim and possibly dangerous.

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  2. Jaffa, the stock market disagrees with you.GC

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  3. Jan 31 2011. No interest rate hike. plenty inflation and no growth.

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  4. Oil over $ 100 a barrel ! Danger ! Danger ! Some say it will go to 150 + . They say that the price of food and fuel is what is troubling these failed states. What then is troubling the developed world? The price of food and fuel. Oh that's alright then !

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  5. TINA-- There is no alternative. Only Labour.

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What do you think? GC