Governor of the Bank of England Mervyn King will be faced with the hardest decision of his life on Thursday, when he and his board are faced with the choice of whether or not to hike interest rates.
That decision may come up all the time, but this moment is somewhat different. King is faced with rising inflation in the UK and weak headline GDP growth, that has actually gone negative in the most recent quarter.
The threat of 1970’s style stagflation hangs heavy over the Bank of England, and that experience may drive them to act quickly and hike rates ahead of schedule.
But there’s a problem with this approach. If the BoE hike rates, it will not have the impact of slowing the rise in food or energy prices, most of which is imported to the UK.
And it may only add to the global rate hike spiral, with key emerging markets China, India, and Brazil having already started.
Nevertheless, public and internal pressure on King is high to respond to inflation.
From The New York Times:
Two members of the bank’s policy making committee recently expressed public disagreement with Mr. King’s insistence that Britain’s current inflation rate had been driven by outside shock factors and that interest rates should not be increased. He has also been accused by another board member, Adam Posen, of jeopardizing the bank’s independence by talking up the Conservative-led government’s deficit-cutting strategy.
So, if King does feel the need to respond, and chooses to hike rates, his move could be step one in a developed world rate hike that could slow economic growth, and send the U.S. economy lower.