The Great Debate UK
-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own.-
Whether their problem is narcotics or alcohol or simply junk food, addicts are usually planning to give up… but not yet. In the meantime, there are always plenty of excuses for delay.
And so it is for the Bank of England. The inflation rate will soon be double the 2% target, but they still judge it is too soon to raise rates above their current all-time low level. Moreover, yesterday’s announcement makes clear there is no end in sight for the gilt buying spree (the “Asset Purchase Programme”).
The Bank’s masterly inactivity is predicated on the MPC assumption that there is still plenty of slack to be taken up in the real economy. As I said here earlier this week, I am less convinced about the extent of the spare capacity in the UK economy today than they are, and hence I see far greater danger of further inflation than the Bank apparently does.
Whenever he approaches a bend, an F1 driver has to make a fine judgment: brake too soon and he loses vital momentum, too late and he risks losing control altogether, with possibly fatal consequences.
For the past year, the MPC has been getting closer to the bend – the point at which it will have to raise interest rates – so, as each month passes without a touch on the brakes, the balance of risk changes as the danger of losing control of inflation increases.
By Ian Campbell
– The author is a Reuters Breakingviews columnist. The opinions expressed are their own –
Just in government and David Cameron’s relationships are in question. Eyebrows have been raised about the prime minister’s friendship with an Old Lady, sometimes known as the Bank of England. The affection appears reciprocated by Mervyn King, the Bank’s governor. But to think the Old Lady’s independence is compromised is probably to take things too far. The bank’s current low interest rate policy looks more than just a political favour.
The Monetary Policy Committee of the Bank of England has kept its key lending rate at a record low of 0.5 percent, last reduced in March 2009 when it indicated that conventional policy had reached its limit and unorthodox measures such as quantitative easing were to be used.
Not exactly shock and awe as the MPC keeps base rates on hold at 0.5 percent while the most recent financial surveys have been unanimous in expecting a no change decision for some time now. It was always going to be an MPC meeting to discuss whether or not to persevere with quantitative easing. The difficulty for the MPC is that it is too early to judge the effectiveness of the quantitative easing. Clearly the Bank of England would prefer to wait at least until it publishes new quarterly growth and inflation forecasts to explain how it wishes to proceed.