Hamish McRae: The Governor of the Bank of England has no idea what interest rates will need to be in three years' time

Economic View: If we get three years of above-trend growth we are going to feel pretty chipper

It is, as the baseball legend Yogi Berra put it, "like déjà vu all over again". The Bank of England's Inflation Report again acknowledges that the economy is growing much faster than it thought, and the Governor, Mark Carney, again asserts that interest rates won't go up any time soon and when they do it won't be by much. OK, maybe "asserts" is unfair, let's say "guides".

The new bit of guidance, that Bank rate will be "materially below the 5 per cent set on average" before the financial crisis, should be taken with the same scepticism as the Bank's forecast last year as to when unemployment would reach 7 per cent, the trigger point for an increase in rates. And yes, I know that was expressly intended not to be a trigger, but that was what the markets jumped on as the likely moment when rates would start to move.

The basic point here is that the Governor and the members of the MPC have no idea what level interest rates will need to be in three or more years' time. None. If that seems a bit harsh, consider this: could any member of the MPC have conceived in the summer of 2007 when rates were 5.75 per cent that in less than two years' time they would be 0.5 per cent?

Actually it is perfectly plausible that rates will be somewhat lower in the future than they have been in the boom years of the decade to 2008. There are a number of reasons why. For a start, governments around the developed world will seek to hold down their borrowing costs. The posh expression is "financial repression"; the more honest, "cheating less-sophisticated savers". Households, lured into the borrowing spree, are still paying down debts, so you don't need higher rates to curb their borrowing. Companies, suddenly squeezed by the banks, will be careful about getting into hock again. And banks themselves have been forced to pare down lending by capital and other requirements.

But that is only a guess. It is, conversely, quite possible that we may be in the early stages of another bubble in property and other asset prices. If that proves right, expect the asset prices to feed into current prices over the next three years. So if inflation at a consumer level goes back to, say 4 per cent, we may very well need rates above 5 per cent to curb it.

The reassertion of the importance of the inflation rate is welcome, but remember that the experience of the past decade has taught us about the huge cost of over-loose monetary policies, even when on the official measures inflation looked acceptable. There is an argument that one could use regulation over the supply of credit, rather than the price of credit, to stop bubbles occurring. But regulating the supply of credit, rather than its cost, creates distortions that damage the financial system in other ways.

Have a look at the graph, the fan chart for growth over the next three years taken from the Inflation Report. The Bank expects that growth will be around 3 per cent a year through to the end of 2016, with the obvious possibilities that it might be higher or lower. But let's assume that this will turn out to be broadly right. Trend growth is 2.25 per cent, maybe a little more. What will three years of above-trend growth do to our attitudes about working, saving and spending? It may be that any latent animal spirits will be crushed by higher taxation, for the scale of the spending cuts necessary to eliminate the deficit look daunting. There may have to be higher taxes after the election. There may be some further economic shock out there. But if we do get three years of above-trend growth we are going to feel pretty chipper. The party will be going good and the task of the central banks will be to take the punchbowl away.

This leads to a wider question, not just a British one: what is the likely shape of the cyclical upswing that most of the developed world is experiencing? We cannot know but we can guess. Think global. The present cyclical upswing must have some way to run. Fiscal policy is two-thirds of the way back to normal – only half way here, but two-thirds in the US and fine in Germany. But the path to normality for monetary policy has only just begun. As for structural policies, that huge bundle of very different things from labour market reform to sorting out the banks, there has been uneven progress but nevertheless progress.

Put this together and you could conclude that the fundamental conditions for balanced growth are being re-established. There are places where policy is sub-optimal. Europe is the obvious example, not because of the clever patching by the ECB, but because of the flawed engineering of the system itself. But that cannot be fixed until there is some realignment of the members of the eurozone and that cannot be done yet. It needs another crisis. But to focus on the rigidities of the world economy is to neglect its flexibilities. You can see that in the UK, for we have managed to get growth going with credit flows much smaller than five or six years ago.

So the world economy should have several decent years to grind away at the debt burdens at every level and begin to restore living standards across the entire developed world. That seems to be the common-sense message of the Inflation Report. Meanwhile, I suggest that for guidance you don't listen to what the Bank says but watch what it does.

Or as Yogi Berra said: "You can observe a lot by watching."

Life and Style
Small winemakers say the restriction makes it hard to sell overseas
food + drink
Arts and Entertainment
A comedy show alumni who has gone on to be a big star, Jon Stewart
tvRival television sketch shows vie for influential alumni
Arts and Entertainment
Carrie Hope Fletcher
booksFirst video bloggers conquered YouTube. Now they want us to buy their books
News
Clare Balding
peopleClare Balding on how women's football is shaking up sport
PROMOTED VIDEO
Arts and Entertainment
Damien Hirst
artCoalition's anti-culture policy and cuts in local authority spending to blame, says academic
Sport
premier leagueMatch report: Arsenal 1 Man United 2
Arts and Entertainment
Kirk Cameron is begging his Facebook fans to give him positive reviews
film
News
i100
Sport
Jonny May scores for England
rugby unionEngland 28 Samoa 9: Wing scores twice to help England record their first win in six
Life and Style
fashionThe Christmas jumper is in fashion, but should you wear your religion on your sleeve?
News
ebooksNow available in paperback
Arts and Entertainment
Jason goes on a special mission for the queen
tvReview: Everyone loves a CGI Cyclops and the BBC's Saturday night charmer is getting epic
Arts and Entertainment
Jerry Hall (Hand out press photograph provided by jackstanley@theambassadors.com)
theatre
Sport
Tony Bellew (left) and Nathan Cleverly clash at the Echo Arena in Liverpool
boxingLate surge sees Liverpudlian move into world title contention
Voices
Neil Findlay
voicesThe vilification of the potential Scottish Labour leader Neil Findlay shows how one-note politics is today, says DJ Taylor
Life and Style
food + drinkMeat-free recipes and food scandals help one growing sector
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Reach Volunteering: Trustee – PR& Marketing, Social Care, Commercial skills

Voluntary Only - Expenses Reimbursed: Reach Volunteering: Age Concern Slough a...

Reach Volunteering: Charity Treasurer

Voluntary Only - Expenses Reimbursed: Reach Volunteering: Crossroads Care is s...

SThree: Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...

Ampersand Consulting LLP: Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

Day In a Page

Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

Oh come, all ye multi-faithful

The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Dr Charles Heatley: The GP off to do battle in the war against Ebola

The GP off to do battle in the war against Ebola

Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

Flogging vlogging

First video bloggers conquered YouTube. Now they want us to buy their books
Saturday Night Live vs The Daily Show: US channels wage comedy star wars

Saturday Night Live vs The Daily Show

US channels wage comedy star wars
When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

When is a wine made in Piedmont not a Piemonte wine?

When EU rules make Italian vineyards invisible
Look what's mushrooming now! Meat-free recipes and food scandals help one growing sector

Look what's mushrooming now!

Meat-free recipes and food scandals help one growing sector
Neil Findlay is more a pink shrimp than a red firebrand

More a pink shrimp than a red firebrand

The vilification of the potential Scottish Labour leader Neil Findlay shows how one-note politics is today, says DJ Taylor
Bill Granger recipes: Tenderstem broccoli omelette; Fried eggs with Mexican-style tomato and chilli sauce; Pan-fried cavolo nero with soft-boiled egg

Oeuf quake

Bill Granger's cracking egg recipes
Terry Venables: Wayne Rooney is roaring again and the world knows that England are back

Terry Venables column

Wayne Rooney is roaring again and the world knows that England are back
Michael Calvin: Abject leadership is allowing football’s age-old sores to fester

Abject leadership is allowing football’s age-old sores to fester

Those at the top are allowing the same issues to go unchallenged, says Michael Calvin