The morning after the night before. Responding to yesterday’s news on inflation, the Bank of England’s governor, Mervyn King, hosted a press conference this morning. Because I live in the United States, it meant a 5am start for me and, in the event, there was little new except that the bank’s Monetary Policy Committee (MPC) now thinks that growth in 2011 may well be more sluggish with even a chance of a quarter of negative growth.
King sounded particularly dovish, as did the MPC member Spencer Dale and the deputy governor, Charlie Bean. King’s views on monetary policy and mine are pretty much the same, these days.
It doesn’t look to me as if anyone joined Andrew Sentance and, perhaps, Martin Weale in voting for a rate rise. It is clear from the labour market release that wage pressure remains benign, which suggests that there are no second-round effects from the inflation spike, which will encourage the MPC to keep rates low.
Governor King made it clear in a response to a question from the BBC’s Paul Mason that it would have made no sense to have had interest rates higher in 2009. Once again, he emphasised that monetary policy has to be forward-looking and that there remains a possibility of deflation further down the road.
King dismissed as ridiculous the argument by those such as Fraser Nelson in the Spectator and Jeremy Warner in the Daily Telegraph – and even a Telegraph editorial – that the current level of inflation is so high.
The sensible majority of the MPC continues to ignore such claims and takes the view that it needs to look through the current inflation numbers. Higher rates in the past would have been the only way to get inflation lower today, which would have plunged the economy back into recession with much higher levels of unemployment than we have now.
Remember that rate increases help savers but hurt borrowers and would inevitably lower consumption and increase unemployment. Just think how they would have hurt people on tracker mortgages. I don’t think the critics have worked out the implications of what they have been saying. Economics is not for amateurs.
Nelson also claims that Britain’s economic growth is “now back to trend”. No, it isn’t. It just fell by 0.5 per cent in the last quarter and growth in 2011 is going to be sluggish at best. The Institute of Directors, the NIESR and the CBI are all forecasting growth well below trend growth of under 2 per cent in both 2011 and 2012. It could well be much worse than that, too, if the austerity programme doesn’t lead to private-sector job creation. At present, there is no sign of that.
If the data continues to come in as they have been this week, I see little chance of a rate rise in May or any time this year. The case for more quantitative easing (QE) may well strengthen later in the year. Nelson, Warner and Sentance are wrong.