27th March 2011 by Shaun Richards
Having previously been someone who had witten into and seen a letter published by the London Evening Standard I am aware that the published version may not fully match up to the version submitted. Accordingly below is a copy of what I submitted and the version which was published on Wednesday the 23rd of March.
The Version I submitted
We have seen that inflation has been a problem in the UK for quite some time. For instance as I looked forward back in late 2009 I argued back then that we needed to take remedial action then. Why? If you look at how long it takes for monetary policy to have an impact then around 18 months is an accurate estimate. Accordingly any proper policy has to take what you know and project it forwards as best you can. At that time I felt that as the recovery began and hopefully accelerated we were in danger of an inflation pick-up that has turned out to be true.
As we stand now we have let inflation rise and I would remind everybody that on our old and in my view superior measure of Retail Price Inflation it is now at 5.5% some 3% over its target. Looking ahead there is the danger of further oil and commodity price inflation further adding to our problems. In response to this I would raise interest-rates in the UK which would help stop inflation being ingrained in our system again and by influencing our exchange rate may also help ameliorate commodity price pressures. There is no guarantee that our exchange rate will improve if we raise interest-rates but it is likely to do so in the current world environment.
In short we have a choice between responding now or running the risk like we have so many times in the past of responding too late and ending up having to be too aggressive in our moves. In essence in a choice between two evils I am choosing the lesser one. If we look for historical perspectives we can compare ourselves with Germany whose central bank the Bundesbank has been willing to act more pre-emptively than the Bank of England and has experienced consistently lower inflation as a result. For example the response to the oil crisis of the mid-1970s was an example of this. These days the European Central Bank has taken over the Bundesbank’s role and at 2.4 per cent inflation is promising to act. Whilst this may not help Portugal,Ireland or Greece it will cap inflation in the core nations and it is planning to act when inflation is much lower.
What was published in the Evening Standard
Raise rates to rein back inflation
Increasing rates now may at least help stop inflation becoming ingrained in the system longer term
WE could have taken remedial action against inflation by increasing interest rates as far back as the autumn of 2009, since it takes around 18 months for monetary policy to have its full impact. RPI, the old inflation measure, is now at 5.5 per cent, three percentage points over target. Looking ahead there is the danger of further oil and commodity price inflation adding to our problems. Raising rates now may at least help stop inflation becoming ingrained longer term and through the likely effect on our exchange rate may also help ameliorate commodity price pressures.
We run the risk, as has happened so many times in the past, of responding too late and ending up having to be too aggressive in our moves. Look, by contrast, at Germany, where the Bundesbank was willing to act more pre-emptively than the Bank of England, so that Germans enjoyed consistently lower inflation as a result. Since 2002 the European Central Bank has also acted pre-emptively.
Shaun Richards, mindfulmoney.co.uk