David Prosser: It is too early to start talking about raising interest rates

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Outlook The second consecutive monthly fall in inflation will come as a relief to those who were beginning to question the Bank of England's longstanding insistence that the consumer price index would, in time, start falling back towards the 2 per cent it is mandated to target. Inflation seemed to peak later than the Bank expected and even now, at 3.2 per cent, the rate remains outside the margin for error granted to its Monetary Policy Committee.

Still, Andrew Sentance's suggestion yesterday that it is now time to begin the process of raising interest rates feels somewhat premature. Mr Sentance, who at last month's MPC meeting voted to increase the base rate from 0.5 per cent to 0.75 per cent, says he is not particularly concerned about inflation getting out of control, but that it is time to think about "a gradual normalisation" of monetary policy.

It's an odd thing to say. One normalises a policy when the conditions it was designed to address have moved closer to normality. Can we really say that is what is happening in the UK economy right now?

Never mind the debate about the double dip, just look at the strains on bank lending, both to business and individuals. That market certainly doesn't feel very normal. What about the question of financial stability? Well, with the eurozone still struggling to contain its sovereign debt woes, we're hardly on the home straight there either. Is our fiscal environment at least heading towards a more comfortable zone? Only if you feel comfortable with unprecedented spending cuts and tax rises.

Mr Sentance wants to be sure that the world understands the MPC remains committed to the 2 per cent target rate of inflation, after the longest period of overshoot since its creation 13 years ago. Quite right: we might as well not bother with this monetary policy tool if we are prepared to junk it when it doesn't suit.

Still, it is not as if inflation isn't now, albeit belatedly, heading in the right direction. And given the withdrawal of the fiscal stimulus to the economy, do we really want to start paring back monetary policy support too?

Interest rates will, in time, need to be raised – and there will be plenty of people, like savers, who will welcome increases. The OECD has said it thinks the end of the year is a reasonable deadline, while other economists favour early in 2011. Now, however, is too soon. Mr Sentance was in a minority of one in voting for a rate rise last time out. Let's hope it stays that way for a little while yet.



Not another banking investigation

One can understand why Andrew Tyrie, the new chairman of the Treasury Select Committee, wants to make a splash – John McFall will be a tough act to follow – but does the world, never mind Britain, really need another inquiry into the retail banking market like the one he announced yesterday?

The TSC's investigation, with only a slightly different remit, will run alongside the Independent Commission on Banking, the Treasury initiated review that has just begun under the leadership of Sir John Vickers. We've just had The Future of Banking Commission, a pretty thorough trawl through the issues that the consumer group Which? organised, and the Office of Fair Trading has spent much of the past five years looking into various different concerns about the banking sector.

Mr Tyrie's inquiry will focus on competition. No bad thing you might say, but both the European Union and the Government are already trying to address the issues the banking sector has with competition, via asset disposals from Royal Bank of Scotland and Lloyds TSB, and there is no shortage of potential new entrants to the industry. There may be some scepticism about their ability to succeed – RBS chief executive Stephen Hester voiced the doubts of many people yesterday – but they are queuing up.

We hear a lot these days from our MPs about their long hours and excessive workloads. Well, Mr Tyrie and his colleagues should put themselves first for once and shelve this unnecessary inquiry.



Kicking away the housing ladder

Reckless, feckless mortgage lenders are an obvious target during any regulatory crackdown on the financial services sector. Who wouldn't concur with the Financial Services Authority's warning yesterday that lenders will henceforth have to do much more to ensure their customers are capable or repaying their home loans?

Well, many of those people who have until now been able to buy property using interest-only loans might have something to say about the watchdog's latest strictures. For its crackdown appears not to be focused only on self-certificated mortgages – so-called liars' loans – but on all advances where borrowers cover interest payments but do not make capital repayments.

There are all sorts of reasons people arrange their mortgages this way. Some – those who can show they are making provisions to repay the capital, with a savings plan, for example – will not be affected, but many more borrowers may now find it harder to get a mortgage. Plan on making catch-up capital repayments later when your income rises? Don't bank on being able to get a loan. Expecting to repay your mortgage by selling the property? That may not be allowed either.

Watchdogs sometimes need to protect people from themselves. But the evidence in the mortgage market does not suggest this is necessary – despite the very ugly recession we have been through, repossessions have not risen in the way they did in the early Nineties, for instance. Borrowers seem mostly to have been able to stay on top of their debts.

Much of the news on the housing market this week has been about how unaffordable it remains to first-time buyers. The FSA's latest announcements will only amplify that difficulty.

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