Why interest rates should rise – and the MPC is failing us, say economists

17th August 2011

The committee voted unanimously in August to keep interest rates at 0.5 per cent. This is despite in the previous meeting two members voting for an increase in interest rates.

The question persists: When will the MPC make the first move, and why aren't its members acting now?

Interest rate futures have seen a big shift in recent months, reports This is Money, in a report that questions when interest rates will rise. They now (17 August) point to summer 2014 for the first rise.

"…the Bank is itching to raise them but needs evidence that doing so would not quash fragile business confidence and trigger a severe slowdown," claims the Daily Telegraph.

Economics editor Philip Aldrick says: "It nearly moved in February before data was published showing the shock contraction in the final quarter of last year. And, this time, the rising clamour of voices on the MPC calling for a rate rise has been silenced again by worries about growth – this time global."

Too scared to act?

Sdharbinger comments on the report in the Daily Telegraph: "Does the MPC have a policy as such to change? They haven't done anything at all for over 2 years, and it would be a brave man who'd bet they will do something in the next year.  I'd bet they just carry on putting their heads in the sand for a good while yet as they're too scared to act."

But crucially, what's happened to tackling the inflation target? asks Mindful Money economist blogger Shaun Richards . Isn't that the role of the MPC?

He says on his blog: "…the official measure at 4.4% is more than twice its official target. We also saw an "institutionalised inflation" effect of this as this meant that on average rail fares would rise by 8%.

"…I would just remind you that their job is supposed to be to aim for official inflation of 2% and it is more than double that. In fact we see something that I have been suggesting for a while that a consensus appears to be building for more asset purchases or what is known as Quantitative Easing."

Schroders European Economist Azad Zangana adds: "In our view, the likelihood of a rise in interest rates before 2013 is now very slim. The Bank of England appears willing to tolerate higher inflation in order to support growth, and believes that the weakness of the global economy will bring inflation down over the medium term. Indeed, there was some discussion of restarting the Bank's asset purchase programme, also known as Quantitative Easing.

"…The prospects of more Quantitative Easing could become more tangible in 2012 once the impact of the rise in VAT comes out of the inflation calculation, bringing inflation back down. For now, the Bank of England remains in ‘wait and see' mode."

An interest rate rise was needed several years ago, stress economists:

Shaun says on his blog: "I argued when I began this blog back in November 2009 that we needed an increase in interest-rates to help us combat what looked like an approaching rise in inflation. We know now that I was right but my point is that we are paying now for a policy error. Adding more Quantitative Easing now would compound this error as its record shows that it increases inflation by much more than it increases growth as otherwise how are we where we are?"

Fletch comments: "Their (the MPCs) sole mandate is look at inflation…do you feel it appropriate to fall on your sword, especially as Shaun Richards was able to see your mistake years ago?"

Back in February, Citywire reported that economists said interest rates needed to rise to curb rising prices. "The five economists who said it is time to lift rates said that if the UK's official rate-setters did not move to tackle inflation then the Bank's credibility would be damaged. Economists fear that if rates are held then it could lead to spiralling inflation as workers demand higher wages, leading to higher price increases."

Shireblogger comments on Shaun's blog : "…monetary policy is now being managed not so much to the medium term target of 2% but to a consensual view that the boat cannot be rocked in relation to interest rates…I sense a genuine fear of near-term deterioration in financial markets and bank stability and no-one wishing to quicken events one way or another or leaving their finger-print on any change in policy in advance."

In conclusion: The MPC needs to change!

Max comments on Shaun's blog : "All these so-called 'independent' bodies are just one more group of expensively renumerated civil servants, whose sole purpose is to deflect criticism from their paymasters in government. The Treasury should set interest rates officially- the end result would be the same, just without the extra expense and needless obfuscation of the present system. Much like the nonsense that is the ratings agencies"

Shaun adds: "My suggestion for a change is that MPC members should stand for election as they are currently much more powerful than most of our elected representatives.

"It is no longer independent and in my view is not acting in the interests of the wider nation so it is time for those who have an alternative view to be able to put it forward in an election. After all is that not what democracy is supposed to be about?"

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