Outlook: Why the Bank has done us a favour
Thursday 09 September 1999
This early bird behaviour is a more important characteristic of the MPC than its dove-hawk dimensions. Although last week's comments by DeAnne Julius and Sushil Wadhwani make it pretty obvious that yesterday's vote was 7-2 (or perhaps 6-3 if Willem Buiter joined them), the presence of a dove or two at one end and a hawk at the other is not important if the birdies in the middle are prepared to flutter quickly to either end of the perch.
What's more, to the extent that the "give growth a chance" consensus made the financial markets less prepared for yesterday's rate rise, there is a lesson for the outspoken doves. The cardinal rule of central banking, as one seasoned observer of financial markets put it yesterday, is talk tough even when you're feeling soft.
Alan Greenspan, the grand old man of central banking, has managed to muse repeatedly about the possibility of an improvement in underlying economic growth in the US without disguising his intention to raise US interest rates pre-emptively. That Fed decision, along with the forthcoming upward revision to world growth prospects from the IMF, must have played a part in the MPC's debate this week. It is rare for UK interest rates to lie below US rates for long.
With an activist MPC, a few more increases must lie ahead - although perhaps with a pause around Christmas to allow for Y2K hiccups. What the bad-tempered industry reaction to yesterday's announcement fails to understand is that this is good news and is precisely why the Bank of England was given freedom from vote-seeking politicians to act independently. It means that while we might yet be in for, say, a 6-7 per cent cost of borrowing, it should not need to go much higher.
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