Business Outlook: The horns of the Bank's dilemma
Tuesday 20 January 1998
If greater domestic inflationary pressure in the UK, bringing the prospect of a widening interest-rate differential compared with other countries, were the only explanation for the high exchange rate, then the Bank of England could lance the boil by getting rates quickly to their peak.
Unfortunately, it is only one reason among several, and the other influences can not be reversed so easily. They include the dollar slipstream effect and the more recent hedging against EMU effect. Both could keep sterling at painful levels.
While industry exaggerates the pain, the sustained exchange rate appreciation is probably starting to take its toll on Britain's balance of payments. This will slow growth overall, but not necessarily domestic demand.
Here is the Bank of England's dilemma. Does the external slowdown outweigh the domestic inflationary push from wage growth and consumer spending? Inflation is very likely to pick up again later this year just because of the lagged effects of pre-election laxness on interest rates. But how much more damage on the inflation front would be done by not raising rates any further now?
This is obviously a difficult judgement for members of the Monetary Policy Committee to make. The chances are that this year will see both weaker growth and rising inflation, with relatively little the Bank can do about it. The Bank is also handicapped by a very optimistic inflation forecast, which means that once inflation begins to overshoot it, the MPC will find it difficult to justify not raising interest rates even if this is thought the wrong thing to do.
Perhaps the other economic figures out this week - retail sales and GDP - will settle things, but analysts are too prone to seeking a definitive answer from a single statistic.
It is an intrinsically hard call to make. Raising rates by a quarter point in February and announcing that they have probably reached their peak might help take some of the steam out of sterling, though this plainly didn't do the trick for anything other than a brief period it was last tried in the summer.
Perhaps the best policy would be for the MPC to adopt a wait and see approach after all.
- 1 East 17 bandmember Brian Harvey in 'very desperate situation’
- 2 Yorkshire man to win £10,000 off a £1 bet placed six years ago if Dan Jarvis becomes Labour Party leader
- 3 Vladimir Putin says Russia will fight for the right of Palestinians to their own state
- 4 Woman filmed launching racist tirade against men on the Tube for speaking in 'own lingo'
- 5 The West has it totally wrong on Lee Kuan Yew
East 17 bandmember Brian Harvey in 'very desperate situation’
Vladimir Putin says Russia will fight for the right of Palestinians to their own state
Ohio Democrat Teresa Fedor speaks out during abortion debate to reveal she has been raped – and is interrupted by laughter from Republicans
Children take eight Isis captives to be beheaded in latest propaganda video
Jeremy Clarkson 'could be given minder' ahead of a potential Top Gear return
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
JK Rowling responds to fan tweeting she 'can't see' Dumbledore being gay
Jeremy Clarkson sacked live: Alan Yentob 'wouldn't rule out' ex Top Gear host's BBC return
Woman filmed launching racist tirade against men on the Tube for speaking in 'own lingo'
David Cameron calls Labour 'hopeless, sneering socialists' while announcing 7-day NHS plans
The West has it totally wrong on Lee Kuan Yew
iJobs Money & Business
Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...
Negotiable: Recruitment Genius: You will be the first point of contact for all...
£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...
£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...