As Mark Carney warns of troubles ahead, should the Bank of England tolerate rising inflation?

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Bank Of Bank of England Governor Mark Carney Attends The Future Forum
Mark Carney has warned that inflation will rise (Source: Getty)

Scott Corfe, associate director at the Centre for Economics and Business Research, says Yes.

Inflation will rise next year, and it is likely to rise sharply as sterling’s remarkable decline feeds through into higher import costs. CPI inflation of 3 per cent is well within the realms of possibility and inflation of 4 per cent – twice as high as the Bank of England’s central target – cannot be ruled out.

Despite this, the Bank should stay committed to loose monetary policy and allow the currency to remain weak. The reality is that sterling has been overvalued for some time and a devaluation was due even without Brexit. The UK imports far more than it exports, and has been a net borrower from the rest of the world for the past 30 years. Devaluation is an opportunity to address these imbalances by making British exports more price competitive.

Consumers will feel the squeeze from higher inflation, but households should be helped through lower taxes, not through a rate rise that would increase mortgage costs and slow economic growth.

Tim Price, author of Investing Through the Looking Glass: A Rational Guide to Irrational Financial Markets, published on 7 November 2016, says No.

Mark Carney’s last reduction in interest rates was already an exercise in futility and now urgently needs to be reversed, given the inflationary surge that is likely after sterling’s welcome depreciation versus the US dollar and the euro. Unilever’s unilateral attempt to drive through price rises will not be the last that UK consumers experience.

Better for the Bank of England to get a grip on incipient inflation now. The British economy is easily robust enough to survive a small increase in rates. It would also be a welcome boost to savers and pensioners who have been savaged by the Bank’s absurd monetary accommodation over recent years – an accommodation that doesn’t even help the banks any more as zero interest rates and a flattish yield curve erode their margins.

It is about time for the Bank to start to normalise interest rates.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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