MPs’ inflation quiz for King
MERVYN King and his colleagues on the Bank of England’s monetary policy committee will testify in front of the Treasury Select Committee (TSC) in Westminster tomorrow, days after suggesting that a further period of quantitative easing could be in the pipeline.
King will face questioning over the Bank’s latest inflation report, in which it was again forced to upwardly revise its forecasts for inflation and downwardly revise its growth expectations.
The Bank has chosen to accept above-target inflation rather than squeezing nominal wages and risking a dent to the economic recovery, King claimed in his Mansion House speech.
“But the Bank did not correctly anticipate the inflation surge,” commented Citigroup’s Michael Saunders.
“The Bank has repeatedly forecast that inflation will fall sharply and drop below target four to eight quarters ahead without policy tightening.”
Two years ago, shortly after interest rates were reduced to their historic low of 0.5 per cent, the Bank projected that inflation would now be around 1.7 per cent, Saunders said.
Stubbornly high prices pressures in the UK have held the consumer price index at 4.5 per cent – over twice as high as the Bank’s two per cent target.
Yet the Bank has shown few signs of raising rates after its chief hawk Andrew Sentance ended his term last month. With seven of its nine-man rate-setting committee voting to hold rates, many in the City are not expecting any tightening until the second quarter of 2012.
FOUR QUESTIONS THE POLITICIANS COULD ASK THE BANK OF ENGLAND
● Why are the Inflation Report’s forecasts consistently wrong?
The Bank says it was impossible to foresee the government’s hikes in VAT, let alone the boom in commodity prices and slump in sterling. Many economists agree, but MPs may ask if it is still wise to base monetary policy on these forecasts, if they are frequently off the mark.
● Why are savers being penalised?
With inflation remaining above target year after year, the nation’s savers are taking the brunt. A basic rate taxpayer needs a savings account of 5.63 per cent per annum just to beat inflation, the website Moneyfacts says.
● Should the Bank have a dual mandate?
Interest rate normalisation would have meant a “weaker recovery”, King claimed at his Mansion House speech, while also stressing the need to rebalance the economy. MPs could ask if it’s time for the Bank’s role to more overtly include factors besides inflation.
● How high is “too high” for inflation?
The Bank has admitted that inflation is likely to surpass five per cent this year. How high does it have to go before King and his colleagues bite the bullet and increase rates?