The MPC has lost the plot again . . .

This time on inflation.

The Monetary Policy Committee (MPC) appears to have lost the plot. It seems to have given up on targeting inflation. The likelihood is that, because of the committee's lack of action, the UK economy may well experience a bout of deflation that will be hard for the economy to recover from. This is a very big worry.

Its job is to target the CPI in the medium term. Specifically it is supposed to aim to get the CPI back to target two years ahead. Its normal policy trigger is to adjust interest rates up or down. Interest rates are at 0.5 per cent now and can't really go any lower. Hence, the MPC has been increasing the amount of money in existence by quantitative easing. Up to this point, it has injected just over £200bn of new money into the UK economy.

Today it issued its Inflation Report with its forecast for inflation and growth. The growth forecast is much more optimistic than those of other forecasters such as the National Institute of Economic and Social Research. But the inflation forecast is more interesting.

Below are two fan charts from the report which show the range of the forecast. The fan widens as time moves forward, as it is harder to forecast further into the future. For those who are technically minded, this is the 90 per cent confidence interval rather than the single line that most other forecasters produce, and suggests what the MPC sees as its range of error.

 

CPI inflation

 

The first chart (5.4) is the forecast produced today and the second (5.5) is the one produced in November 2009. It is clear that the central forecast for inflation -- the darkest part of the fans -- is lower two years out than it was in November. The vertical dotted line is the outcome that the MPC, by statute, focuses on, because its job is to target inflation a couple of years in the future. It can't do anything to influence the inflation rate next week or the week after. Changes in interest rates, and changes in quantitative easing, take some time to work through the economy.

Inflation is going to jump over the next few months, primarily because of the rise in petrol prices and the increase in VAT from 15 per cent to 17.5 per cent. Indeed, the likelihood is that the committee will have to write a letter to the Chancellor, Alistair Darling, explaining why inflation is above target. They will just say: "Don't worry, it will fall back down very quickly."

 

CPI inflation 2

 

But the big concern is that inflation is below the target two years out, according to the MPC's forecast. The implication of this is that the Bank of England either should have been cutting interest rates further by a lot, which it can't, or it should have been doing more quantitative easing. Another possibility is that the pound would have to fall further, which may be something the MPC is targeting.

And the committee's forecast for growth is incredibly optimistic. It is much more optimistic than I think is reasonable, and also more optimistic than the recent projections from the NIESR. If output turns out to be lower than the MPC forecast, then inflation will be even lower. The likelihood is that before two years are up, even based on this forecast, the committee will have to write a letter to the Chancellor explaining why inflation is below the target!

The MPC conditions its forecast on market interest rates, which have fallen since November, so that should imply more inflation, not less, as such a change is stimulative. The MPC doesn't forecast these rates in its report but just accepts what the markets predict they will be. Worryingly, even when the assumption is made that interest rates will remain at 0.5 per cent across the forecast horizon, inflation never hits the target. It did hit the target in November using this assumption. So the implication is that the future will be more disinflationary than the MPC thought in the past.

The implication of this latest inflation forecast is that the MPC needs to put more stimulus into the market. In normal times, I would be voting for a big cut in rates, perhaps as big as 150 basis points. These days I would also be voting for lots more QE -- and sensible members of the MPC such as David Miles probably did that. An alternative would be to see the exchange rate fall in the wake of this news -- which it already has this morning -- and for gilts to rise, which they also have done this morning. It is now clear that interest rates are not going to rise any time soon, and so the expectation is that the yield curve will fall further.

As each week goes by, I am becoming more and more convinced that this MPC is not fit for purpose. The Inflation Report published today was another nail in its coffin.

David ("Danny") Blanchflower is Bruce V Rauner Professor of Economics at Dartmouth College, New Hampshire, and professor of economics at the University of Stirling. He is a former member of the Monetary Policy Committee. His economics column appears weekly in the New Statesman.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

Getty
Show Hide image

Article 50 deadline: Nick Clegg urges Remainers to "defy Brexit bullies and speak up"

The former deputy Prime Minister argued Brexiteers were trying to silence the 48 per cent. 

On Wednesday 29 March, at 12.30pm, Britain's ambassador to the EU, Tim Barrow, will hand deliver a letter to the European Council President, Donald Tusk. On that sheet of paper will be the words triggering Article 50. Nine months after Britain voted for Brexit, it will formally begin the process of leaving the EU.

For grieving Remainers, the delivery of the letter abruptly marks the end of the denial stage. But what happens next?

Speaking at an Open Britain event, former Deputy Prime Minister and Lib Dem Leader Nick Clegg had an answer. Responding to the concerns of a scientist in the audience, he declared:

“The most important thing of all is people like you make your voice heard. What the hysterical aggression from the Brexiteers means is they want to silence you.

"That’s why they attack everyone. The Bank of England - how dare you speak about the British economy? How dare judges make a judgement? How dare Remainers still believe they want to be part of the EU? 

"What they systematically try to do is bully and delegitimise anyone who disagrees with their narrow world view.

"It’s a ludicrous thing when 16.1m people - that’s more than have ever voted for a party in a general election - voted for a different future, when 70 per cent of youngsters have voted for a different future.

"It is astonishing these people, how they give themselves the right to say: 'You have no voice, how dare you stick to your views how dare you stick to your dreams and aspirations?'

That’s the most important thing of all. You don’t get bored, you don’t get miserable, you don’t glum, you continue to speak up. What they hope is you’ll just go home, the most important thing is people continue to speak up."

He urged those affected by Brexit to lobby their MPs, and force them to raise the issue in Parliament. 

After Article 50 is triggered, the UK positioning is over, and the EU negotiators will set out their response. As well as the official negotiating team, MEPs and leaders of EU27 countries are likely to give their views - and with elections scheduled in France and Germany, some will be responding to the pressures of domestic politics first. 

For those Remainers who feel politically homeless, there are several groups that have sprung up to campaign against a hard Brexit:

Open Britain is in many ways the successor to the Remain campaign, with a cross-party group of MPs and a focus on retaining access to the single market and holding the government to account. 

Another Europe is Possible was the alternative, left-wing Remain campaign. It continues to organise protests and events.

March for Europe is a cross-Europe Facebook community which also organises events.

The People's Challenge was a crowd-funded campaign which, alongside the more famous Gina Miller, successfully challenged the government in court and forced it to give Parliament a vote on triggering Article 50.

The3million is a pressure group set up to represent EU citizens in the UK.

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.