The Bank of England releases its latest minutes this week and so the great rate debate continues. Will anybody have joined Andrew Sentance and Martin Weale in voting to hike? Many argue raising domestic rates can’t curb imported inflation but Sentance points out it might strengthen sterling, which would help. In practice, every currency analyst I’ve asked dismisses lasting appreciation of the pound from higher base rates.
Sentance also argues the output gap is less than imagined by doves. I agree, but only because most experts, including current and ex-MPC members, tell me you can’t measure it. In which case output gaps as an argument for doing anything is hopeless.
Employment fell in the fourth quarter, wage growth is sluggish, broad money growth restrained (around two per cent), bank lending constrained (Barclays has cut asset finance to firms with a turnover of under £5m), house prices stagnant (at best) and mortgage lending abysmal. Oh, yes, and we’re about to launch an cutback in government spending with more tax rises.
So against that backdrop, what’s the argument for raising rates? Not to cure imported inflation in two years’ time, but credibility. If people begin to think the Bank is no longer committed to the inflation target, then it’s game over for monetary credibility. But credibility with who? The holders of over 11m mortgages, of which an ever greater number are pegged to variable rates? If credibility is the only reason for putting up rates then we’ve already lost it.
Supporters of higher rates, including the editor of this publication, also say they have to rise at some point from this emergency base, so you may as well start now. True, if you assume there’s no risk from a tightening cycle. But as we saw in last week’s Channel 4 news report on food banks, many families are on the verge of financial meltdown. Rate rises now could have a disastrous impact on sentiment, that quickly translates into something far worse. At that point the political pressure on the government to offset tighter monetary policy with less austerity will be overwhelming.
The reality is we’re no longer discussing whether monetary policy can impact inflation – we’re arguing over whether we maintain the pretence that it can. The narrow two per cent inflation target (plus or minus one per cent) is out of date. We should change the remit to one similar to the Fed, including growth and employment – and let us stop discussing making futile gestures purely for the sake of appearance.
Ross Westgate is co-anchor of CNBC’s Worldwide Exchange. Tweet @rosswestgate