The governor is warning against rate rises

18th May 2011

The UK Consumer Prices Index (CPI) rose sharply last month from 4% to 4.5%. In a letter to the chancellor George Osborne, Mervyn King said the Bank expected inflation to slip back towards its official 2% target during 2012 and 2013.

He is reported as writing: "Unemployment is high and wage growth is weak at around 2% a year. Money and credit growth are both very low. It is therefore possible that, as the temporary influence of the factors currently pushing up on inflation wanes, these downward pressures … could drag inflation below the target."

Commenting on the story and criticising the governor of the BofE, commentator Littleredcar says: "I am continually baffled with his decisions and reasoning. Even someone with basic economic training can see that interest rates need to be raised, or the problem will only get worse."

Mindful Money's economist blogger Shaun Richards says on his blog: "It becomes plainer with each passing month that the UK does have an inflation problem and that the body which is supposed to be our guardian is asleep.

"Indeed it is looking like yet another Quango which could be cut and the money saved. As we look forwards the recent dip in oil and commodity prices may help us in the latter part of 2011 but we are starting from much too high a base level and commodity prices are apt to spin on a sixpence. Let us hope that commodity prices do continue this fall as our inflation guardian has all the characteristics of a chocolate fireguard."

On Shaun Richards' blog, Janchild says: "Surely the BOE must act to raise rates a little…  Once inflation gets a substantial hold as it has now done according to all the ways of measuring it which Shaun has outlined, there is a danger of a sort of feedback loop so that the rate of increase will actually accelerate.  We are in danger of this happening now.  Never mind about the people who will undoubtedly lose out – ie banks and people with mortgages which are "underwater".  Inflation going out of control is the greater of the two evils.  Surely the BOE sees this unless they really are completely useless."

Azad Zangana, Schroders' European Economist, added: "We expect inflation to fall sharply next year (due to the passing of the VAT effect) – we no longer expect inflation to fall back to the Bank of England's 2% target.

"However, there is now a significant risk of second round wage effects coming through later in response to the higher inflation we expect to see in the coming months. We think this will prompt the Bank of England to act sooner rather than later, with an August interest rate rise looking very likely."

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8 thoughts on “The governor is warning against rate rises”

  1. Anonymous says:

    Mr. Ward writes that “…nominal GDP rose by an annual 4.4% in the fourth quarter. With potential output probably growing by less than 2% per annum, this rate of increase is incompatible with achievement of the 2% inflation target over the medium term.” Here he seems to be speaking about the implicit GDP deflator, which is quite different from the UK CPI as an inflation measure. But if one ignores this, it seems that inflation is on about a 2½% path rather than 2% path. It’s not surprising as this would seem to be the Bank of England’s effective new target rate since a forward guidance regime was announced in August. Andrew Baldwin

  2. David Lilley says:


    Simon is always terse but what we should take home from his post today are:

    1. A 1.1% increase in the labour force in 2013. Magnificent. Especially for those who lost their jobs in the “debt crisis” and now have sustinence.

    2. A 2.8% increase in average income, 0.8% above CPI. Gone is the mischievious talk of a cost of living crisis. It was always mischievious talk because who on earth would expect a boom in incomes in the greatest recession ever.

    3. Recent solid growth has been broadly based and balanced, increasing confidence in its sustainability.

    4. Consumer spending isn’t the driver as it is less than GDP growth.

    5. Fixed capital investment by business grew by 8.5%. That is, the one thing that we needed to grow is now growing.

    6. Net exports were little changed over the four quarters – import penetration, encouragingly, fell. That is, the other encouraging driver, exports v imports, was sustained despite the increase in Sterling.

    It all looks pretty cool to me.

    The bottom line is that inflation will rise and drive interest rates sooner than most expect.

    1. David Lilley says:

      Above all these considerations we should speak of Ukraine and Syria. Syria, now 130,000 dead. Ukarine not wanting its ex-leader for corruption (he is a billionaire) but for mass murder. They cannot go for corruption because they only want office because of the benefits of corruption. Socialism is a byeword for corrupton. But it sounds good.

      1. Patrick, London says:

        David… look around you… Capitalism is equally a byword for corruption.

        As both systems continue to fail, they become increasingly identical.

        Both are equally susceptible to croneyism. Both have ultimately involved an exploited underclass. Both have created undemocratic oligarchies. Both involve media control to suppress unrest, and stifle rebellion. I think the only distinction that I can see is that socialism at it’s worst, attempts to create enemies were none exist, while globalised free market capitalism create trivial technological panaceas, and throwaway tat, that distract the mind, all at the expense of Victorian Workhouse conditions in globalised sweatshops.

        1. David Lilley says:

          Dear Patrick,
          It is good to see comments on Simon’s posts. The UK would be in better shape with greater employment and growth if the “good news” story that Simon paints above were out there. Confidence would increase across the board.
          We all want a peaceful law abiding national and global society. This alone should be our political aspiration. We like society as it provides defence, law and order, the NHS and a few other things that we couldn’t provide by ourselves as individuals.
          We can all get on with our lives; earning money from the “profit” of selling our labour or the “profit” from our entreprenuership. Note the repeat of the word “profit”. The society bit comes from a combination of Adam Smith’s “invisible hand” and taxation. This automatic path towards our political aspirtion above was further embelished by J S Mill’s “On Liberty” giving the individual complete freedom provided he didn’t break the law.
          We were in a very nice place that was enjoyed by Karl Marx amongst others until he destroyed it with his ridiculuos Hegellian “historicism”. History has no path nevermind an inexorable path that leads to capitalism, revolution and communism. But the terms capitalism and socialism and left and right Hegellianism have stuck. A genie was let out of the box that was terrible news for our political aspiration above.
          It was sensible shorthand to describe the West as capitalist and the USSR as socialist but we never had capitalism. We continued to have “state interventionism” where the rich entreprenuer or worker didn’t get richer and richer and control man’s destiny. On the contrary, he just paid more progressive taxation and couldn’t send children up chimneys or pay less than the NMW.
          Capitalism would stink if it had got off the ground. Instead, the myth of capitalism gave birth to socialism which stinks and did get off the ground.
          I say all this without any sign of media control and I don’t regard smartphones and statins as tat.

          1. Patrick, London says:

            Compare your last smartphone with the latest variation and then examine the manipulation with the Smart phone provider consistently upgrading an OS that demands more of the hardware, in an attempt to coerce a new purchase out of you.

            How long have we had HD televisions before we began to be told that 4K was the be all and end all.

            Is capitalism the only ideology that would have lead to medical advances?

            The invisible hand is a fallacy, a construct that inevitably required the subjugation of many fundamental aspects of human nature. I see no difference in that concept, to the concept of utopia.

            Didn’t the current government just forcibly wipe it’s entire archive form the Internet Archive? Aren’t we seeing regular and consistent goal post shifting in what constitutes a suitable measure of inflation? How much coverage does each of these things get in the mainstream media?

            What makes you think this pure Adam Smith derived capitalism could ever work when the evidence is all around of the following:

            Deregulate and be abused
            Regulate and your regulators will be corrupted either through sanctioned lobbyists, or croneyism of another kind
            Impose trade tariffs be protectionist
            Encourage globalisation and allow exploitation of international underclasses.

            To me, capitalism encourages the pursuit of wealth over anything else, and Adam Smith’s hope about morality, fairness, balance being a guide to prevent oligarchy, despotism and corruption has been proven to be naive at best.

            There is scant sense of “noblesse oblige” in the minds of those in this pursuit of wealth at any cost.
            Not until perhaps, the thrill of accumulation of financial wealth (and the power and influence it brings) has been finally sated, do we see the urge for something else, in the form of philanthropy, and legacies.

            and so on – blah blah blah… Sorry David. I get really tired of what i see as trite bashing of socialism, moreso when it seems to be accompanied by a rose tinted view of even the purest concept of capitalism. I should go and get my smart phone and see if the new processor has changed my life at all. 😉

          2. David Lilley says:

            Dear Patrick,

            It has been excellent talking to you. I don’t like to hijack Simon or Shaun sites as they should belong to them. I am continuing the discussion “Socialism Stinks” on the NIESR site.

            I do agree with your comments but more especially if you replaced the word capitalism with interventionism which was my main message.

            You might be interested in reading Karl Popper’s “The Open Society and its Enemies” volume 2 Marx and Hegel.

    2. Noo 2 Economics says:

      Hallo David,
      Happy to agree with you on this. It’s interesting that Shaun has a completely different take on the same numbers, but unfortunate that Simon only mentions GDP by volume numbers of 2.8 and not the GDP median calculation of 1.8. Shaun, by contrast mentioned both. It’s important we have all the facts before analysing and Simon fell down on this today.

      Completely agree interest rates are going to have to increase, probably late this year unless the BOE can continue to flannel the markets with forward guidance, the alternative is to let inflation rip and I’m not sure that the authorities are at all averse to that idea.

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