David Prosser: Let's not raise rates for the sake of doing so

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The Independent Online

Outlook One can see what Spencer Dale, the Bank of England's chief economist, was getting at yesterday when he warned that the Monetary Policy Committee could damage its credibility by failing to raise interest rates despite persistently high inflation. The MPC's view that inflation will fall back towardstarget in the medium term seems likely to have passed by those who do not follow the debate very closely – most people, in other words. In which case they may well have come to the conclusion that the MPC has lost its grip.

The question is whether that matters. Clearly, it would do if the workforce, faced with expectations of rising inflation, were fighting for and securing higher wage settlements. That's how an inflationary spiral begins. But the data on this has been scrutinised in recent weeks and months – precisely because of this fear – and it currently suggests that while wage settlements are creeping up, they are not doing so quickly.

If an interest rate rise is not immediately necessary to address that eventuality, what might it achieve? Certainly not any marked improvement in the inflation figures, at least in the short term, because the factors driving prices higher – the commodities boom, in particular – are global. A 0.25 percentage point increase in the base rate, as Mr Dale voted for at the most recent MPC meeting, would hardly see oil prices tumble or the cost of food fall back.

If higher borrowing costs are neither immediately necessary nor likely to bring inflation down, we should consider the effects they might produce: most notably afurther decline in consumer confidence, with all the dangers that poses. Mr Dale himself concedes he is worried about the strength of the recovery. Why risk weakening it further unless we really have to?