The Monetary Policy Committee must abandon its interest rate policy and use devaluation and currency intervention to pull the economy out of its decline, an independent forecaster said today.
The Ernst & Young Item Club said inflation was likely to fall sharply this year, which would make it hard for the Bank of England to hike rates to counter inflationary consumer spending. Instead it should talk down the pound and back up the policy by selling sterling, the club said.
The warning comes ahead of official growth figures this week that are likely to show the UK economy ground to a halt over the winter.
According to the Item forecast, which is based on the Treasury's economic model, inflation will dip below the 1.5 per cent that would require the Governor, Sir Edward George, to write a public letter to the Chancellor.
"This will make it difficult for the MPC to raise rates aggressively," said the report's author, Peter Spencer. "This should occasion a review of the committee's whole approach to monetary policy, which is looking increasingly unbalanced."
Seven rate cuts last year took the base rate to 4.0 from 6.0 per cent and stimulated the high street and the housing market enough to prevent the collapse in manufacturing and exports from pushing the UK into recession.
"However, these policies have pushed the economy into a very unbalanced state, one that is far too dependent upon domestic demand," Professor Spencer said.Reuse content