Bank worried by inflation risk
Friday 18 October 1996
Mr King pointed out that people born in 1966, turning 30 this year, had seen the value of pounds 1 fall to 10p during their lifetimes. The experience of the "inflation generation" had distorted crucial decisions on jobs and housing, for example.
Mr King accepted that the battle to reduce inflation and keep it low had short-term costs in terms of lower growth, but argued that the costs were temporary while the benefits of low inflation were permanent.
The costs of inflation include distortions arising from the non-indexation of the tax system, equivalent to about pounds 3.5bn in the case of capital taxes, the costs imposed by the need to change prices frequently, and most importantly, the burden of avoiding the impact of inflation. In addition, uncertainty about inflation had added an estimated half percentage point risk premium to UK interest rates.
Inflation was an unnecessary problem he said. "There are far more important real economic problems which face us."
Britain did not yet have the anti-inflationary credibility to afford any flexibility in monetary policy, Mr King said. There was not yet enough of a track record of commitment to low inflation to use interest rates to offset short-term dips in growth.
The Bank's last Inflation Report in August said Britain was at the stage of the economic cycle when policy mistakes were usually made, in an implicit warning against further interest rate cuts when many indicators pointed to faster growth and future inflation. Mr King repeated that veiled warning yesterday, saying price stability was "within our grasp, provided that we continue to pursue consistently a suitable inflation target".
He said: "Price stability should be part of our economic constitution, common to all parties, which provides a degree of macroeconomic stability to enable governments to devote both the time and energy to the great issues of the day."
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