Photo: The Mail
English inflation has been well above the central bank’s target for four years, though many have excused this away as being due to higher commodity prices globally, an increased value-added tax (VAT), or a weaker British pound. It’s been perceived as a temporary phenomenon, and thus not a concern. Thus the central bank has maintained low interest rates in a bid to stimulate the economy, even though low interest rates usually risk stoking inflation.Thing is, inflation needs to come down soon, because the notion that it is just temporary is wearing thin explains Spencer Dale, the chief economist at the Bank of England. The second that inflation picks up, and the problem becomes chronic in the minds of worker and consumers, is the moment that England would have to aggressively hike its interest rates.
“We lose our credibility at our peril – once the genie of inflation credibility escapes it is costly to put back,” he said. “The response to a possible loss of credibility is clear – monetary policy would need to tighten, possibly aggressively so.”
However, he acknowledged that there was substance to the concerns. Inflation has been “significantly higher than the 2pc target” for the past four years, he accepted. “The period of above target inflation; the fact that inflation has been higher than expected; and that it is likely to remain above target until the end of next year all contribute to the risk that credibility and confidence in the MPC may start to waver.”
There’s far more uncertainty here than in the U.S., where inflation has been falling and deflation is the prime concern. England’s peculiar situation, whereby it has above-target inflation yet maintains an extremely loose monetary policy, means that the English interest rate environment could change dramatically in a heartbeat, which has to keep government bondholders up at night.