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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

A nap a day could save your life - and here's why

A nap a day could save your life

A midday nap is 'associated with reduced blood pressure'
If men are so obsessed by sex, why do they clam up when confronted with the grisly realities?

If men are so obsessed by sex...

...why do they clam up when confronted with the grisly realities?
The comedy titans of Avalon on their attempt to save BBC3

Jon Thoday and Richard Allen-Turner

The comedy titans of Avalon on their attempt to save BBC3
The bathing machine is back... but with a difference

Rolling in the deep

The bathing machine is back but with a difference
Part-privatised tests, new age limits, driverless cars: Tories plot motoring revolution

Conservatives plot a motoring revolution

Draft report reveals biggest reform to regulations since driving test introduced in 1935
The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory