Bank of England denies softer stance on rates

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The Independent Online
The Bank of England hit back yesterday against reports that it had backed down in the debate over interest rates. Mervyn King, the Bank's chief economist, said evidence on the prospects for the economy had shifted enough to put off an increase, but higher rates would probably still be needed to hit the Government's inflation target.

Mr King made it clear in a speech delivered at the Centre for Economic Policy Research in London that the Bank would resist attempts to fine- tune policy in reaction to a short-term slowdown in growth.

``If we want more long termism in British industry then there is no better place to start than to ensure long termism in monetary policy,'' he said.

``It would be a serious mistake for monetary policy to look backwards and respond simply to the latest quarterly growth rate rather than look forward to what is likely to happen over the next two years, uncertain though that outlook is,'' he added.

Recent figures suggesting that growth has slowed have prompted some economists to argue that base rates need to fall.

Mr King emphasised that the Bank had not wavered in its commitment to low inflation. Rather, he said, the anti-inflationary stance of some commentatorshad weakened.

Mr King's speech to economists - including many of the most prominent City commentators - followed one by Eddie George, Governor of the Bank of England, last week that also attempted to clarify how the Bank decides its advice on base rates.

Reacting to criticisms of the Bank's forecasts of inflation, Mr King said it was essential to look forward. The precise forecast did not matter as much as the relative probabilities of ending up with a higher or lower rate of inflation.

Mr King said: ``We are not the Mr Micawber of the central banking world - inflation target 2.5 per cent, inflation projection 2.4 per cent, result happiness; inflation target 2.5 per cent, inflation projection 2.6 per cent, result misery.'' It was the balance of risks that determined the Bank's advice .

In reply to questions, Mr King said the Bank's advice would evolve as prospects for the economy changed. It was essential to recognise the uncertainties, and there was no hard and fast rule.

He also denied suggestions that a 1-4 per cent range around the 2.5 per cent inflation target meant that in practice the target had loosened. It simply indicated how much volatility around an average long-run inflation rate of 2.5 per cent could be expected.

He said having an inflation target would work only if there was widespread public support for price stability. In a veiled warning that this support was being undermined, he said a number of people seemed to believe the inflation target of 2.5 per cent was sensible, and that failure to increase rates would likely result in inflation exceeding the target. But paradoxicallythey thought interest rates should be reduced.

Mr George and Mr Clarke hold their next monthly monetary meeting on Friday.A majority of City economists expect base rates to stay unchanged but a significant minority think a reduction is possible.