With inflation expected to hit 3 per cent in 2017, is the Bank of England right to prioritise growth over price stability?

Savers are caught in the trap of rising inflation and falling interest rates (Source: Getty)

Martin Beck, senior economic adviser to the EY Item Club, says Yes.

In light of the sharp post-referendum drop in the value of the pound, prices of imported goods are set to increase. As a result, inflation will rise over the next year. As our forecast suggests, CPI inflation is expected to peak at around 3 per cent next year, before then dropping back to the Bank of England’s 2 per cent target after that. Historically, this will be below the 3.3 per cent average seen in the 1990s and barely a third of the rate seen in the 1970s and 1980s. All in all, it looks like a return to the inflationary bad old days is not on the cards. Quite rightly, the Bank of England’s Monetary Policy Committee has chosen to look through what will be a short-lived increase in inflation and aim its policy at supporting the economy. In a globalised world, where both companies and workers face intense competition, the odds of a transitory and exchange-rate driven increase in inflation becoming embedded in the behaviour of those setting prices and wages are remote.

Andrew Sentance, senior economic adviser to PwC and a former member of the Bank’s Monetary Policy Committee, says No.

It is a fallacy that lower interest rates and looser monetary policy can boost economic growth except perhaps in the very short term. It was entirely right for the Monetary Policy Committee to cut interest rates in the depths of the financial crisis. But we have now had record-low rates for over seven years. Monetary policy can offset short-term shocks to economic growth – but price stability should be the key longer-term objective. The 2 per cent CPI inflation target is not the Holy Grail of monetary policy. We need price stability more broadly, including house prices. Very low interest rates and QE have pumped up values in the UK housing market and for other financial assets in the interests of supporting economic growth. This is a flawed policy and the MPC’s latest monetary boost is likely to add more fuel to asset price inflation. The Bank may think it can boost growth with more monetary stimulus, but it ran out of ammunition a long time ago.

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