Outlook: Bank may be getting it right after all

MERVYN KING, the Bank of England's Deputy Governor, gave his usual virtuoso performance at the quarterly Inflation Report briefing. Any reasonable person looking at the evidence, he argued, should not have been surprised by the Monetary Policy Committee's interest rate decisions. And indeed, Mr King made it seem very logical - with world growth even weaker and inflation incredibly subdued, why was anybody caught on the hop by last week's half-point cut?

Asked whether the steep drop in interest rates since October was not evidence that the Bank had earlier made a mistake in raising them too high and leaving them at that level for too long, Mr King pointed to the run of bad news about growth and good news about inflation since then. Perhaps other people felt they had been more far-sighted, he said, but the MPC had reacted to actual events.

It was a fair enough gibe. It is easy for pundits and pointy heads to have strong views about what the MPC ought to be doing, but many have made far bigger mistakes about what was happening in the economy. Their errors, unlike any the committee might make, can be quietly buried in the archives. What Mr King glossed over, however, was the fact that the MPC clearly has changed its mind quite radically about the degree of inflationary pressure in the economy. In particular, the wage inflation it thought was in the pipeline does not exist. The Bank's inflation forecast, for any given interest rate or growth rate, is lower than it was.

Whether or not this counts as a mistake, the financial markets were only too pleased to react to the forecast by pencilling in still lower interest rates. This is because many analysts in the City in their hearts believe the Bank is following a growth target rather than an inflation target - or if not, that it ought to be. They work backwards from the Bank's growth forecast, showing the economy pulling back from the brink of recession in the next few months if interest rates are unchanged, to the conclusion that rates therefore ought to be cut.

This would close some of the gap between the Bank's gloomier economic outlook and the relatively optimistic forecast that is the legacy of the Treasury's Pre-Budget Report. If rates fall to 5 per cent or lower, growth will be a bit better, though perhaps not as high as Gordon Brown hoped in November. The Chancellor, like the City, is depending on the MPC to cut interest rates again.

Yesterday's Inflation Report, stressing the downside risks to growth and inflation, certainly encouraged its readers to hope so. And, as Mr King said, the Bank has shown it will do what is needed to keep inflation from falling too low as well as climbing too high.

Whether interest rates drop to 5 per cent, or 4.5 per cent, or stay unchanged, it is important to keep the broader economic picture in mind. Inflation is low and is expected to stay low, while the economic downturn is sure to be the mildest since the 1960s. No doubt it could have been even better, but whatever the MPC's tactical mistakes, it is hard to fault the strategic results.

PROMOTED VIDEO
News
people
Life and Style
tech
News
Justin Bieber performing in Paris earlier this year
people
Arts and Entertainment
Martin Freeman and Lauren O'Neil in Jamie Lloyd's Richard III
theatreReview: The monarch's malign magnetism and diabolic effrontery aren’t felt
Arts and Entertainment
'Molecular Man +1+1+1' by Jonathan Borofsky at Yorkshire Sculpture park
tv
News
Glamour magazine hosts a yoga class with Yogalosophy author Mandy Ingber on June 10, 2013 in New York City.
newsFather Padraig O'Baoill said the exercise was 'unsavoury' in a weekly parish newsletter
Extras
indybest
News
people'She is unstoppable', says Jean Paul Gaultier at Paris show
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Alexis Sanchez and apparently his barber Carlos Moles in Barcelona today
football
Arts and Entertainment
Miley Cyrus has her magic LSD brain stolen in this crazy video produced with The Flaming Lips
video
Arts and Entertainment
In his own words: Oscar Wilde in 1882
theatreNew play by the Oscar Wilde's grandson reveals what the Irish wit said at his trials - and what they reveal about the man
News
people
Arts and Entertainment
Unless films such as Guardians of the Galaxy, pictured, can buck the trend, this summer could be the first in 13 years that not a single Hollywood blockbuster takes $300m
filmWith US films earning record-breaking amounts at the Chinese box office, Hollywood is more than happy to take its lead from its new-found Asian audience
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

HR Advisor - 6 months FTC Wimbledon, SW London

£35000 - £40000 per annum + Benefits: Ashdown Group: HR Advisor - 6 Months Fix...

IT Manager - Tolworth, Surrey - £40,000

£37000 - £40000 per annum: Ashdown Group: IT Manager - Tolworth, Surrey - £40,...

Compliance Officer - Trading Firm - London

£55000 - £65000 per annum + excellent package & bonus expectations: Real Staff...

Senior Compliance Executive - Top Bank - London

£80000 - £90000 per annum + competitive: Real Staffing: A highly successful Co...

Day In a Page

The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice
Hollywood targets Asian audiences as US films enjoy record-breaking run at Chinese box office

Hollywood targets Asian audiences

The world's second biggest movie market is fast becoming the Hollywood studios' most crucial
Grindr founder Joel Simkhai: 'I've found love on my dating app - and my mum keeps trying to hook me up!'

Grindr founder Joel Simkhai: 'I've found love on my dating app'

Five years on from its launch and Grindr is the world's most popular dating app for gay men. Its founder Joel Simkhai answers his critics, describes his isolation as a child
Autocorrect has its uses but it can go rogue with embarrassing results - so is it time to ditch it?

Is it time to ditch autocorrect?

Matthew J X Malady persuaded friends to message manually instead, but failed to factor in fat fingers and drunk texting
10 best girls' summer dresses

Frock chick: 10 best girls' summer dresses

Get them ready for the holidays with these cool and pretty options 
Westminster’s dark secret: Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together

Westminster’s dark secret

Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together
A History of the First World War in 100 Moments: Dulce et decorum est - a life cut short for a poet whose work achieved immortality

A History of the First World War in 100 Moments

Dulce et decorum est: a life cut short for a poet whose work achieved immortality
Google tells popular music website to censor album cover art in 'sexually explicit content' ban

Naked censorship?

The strange case of Google, the music website and the nudity take-down requests
Howzat! 8 best cricket bats

Howzat! 8 best cricket bats

As England take on India at Trent Bridge, here is our pick of the high-performing bats to help you up your run-count this summer 
Brazil vs Germany World Cup 2014 comment: David Luiz falls from leader figure to symbol of national humiliation

David Luiz falls from leader figure to symbol of national humiliation

Captain appears to give up as shocking 7-1 World Cup semi-final defeat threatens ramifications in Brazil