MPC’s downgrade shows it is too early to raise rates

Latest forecasts are likely optimistic, given the euro area’s downside risks

Share

I was in Switzerland last week – an intriguing place most of us know for little except making watches and knives with oodles of blades whose purpose remains unclear.

I’ve been racking my brains to come up with famous Swiss people, without much success: the economist John Kenneth Galbraith once said that the only two Swiss that anyone has ever heard of were Calvin, who was French, and William Tell “who had a somewhat perilous attitude to parental duty”.

But the performance of the Swiss economy stands in stark comparison with that of the UK. Since the start of 2008, Switzerland has grown 5.2 per cent compared with a decline of 3.2 per cent in the UK.  Unable to raise interest rates above zero for fears of derailing the economy, the Swiss National Bank has been forced to rein in house prices by raising the capital it requires banks to hold against mortgages. This follows its capping of the Swiss franc against the euro in September 2011. These kinds of unconventional policies should be on the table for consideration when the regime changes at the Bank of England in July.

That brings us to the latest forecast of the MPC which, as expected, contained gloomy news of Britain’s economic prospects and in particular higher inflation. It should be said, though, that a good chunk of this inflation – amounting to 1 per cent of the present 2.7 per cent – is because of what the committee calls administered prices, those which are affected by government or regulatory decisions and not from demand pressure so should be ignored in setting monetary policy.  A good example is tuition fees which the MPC expects to contribute around 0.3 percentage points to Consumer Price Index inflation throughout next year and 2015. 

Most embarrassingly, though, the MPC once again downgraded  the growth forecast in its 20th-anniversary Inflation Report.

The UK economy is going nowhere and even the latest forecasts are likely overly optimistic, given the still substantial risks to the downside from the euro area and not least because small businesses remain capital constrained. Take a look at the fan chart, which is constructed so that outturns are expected to lie within each pair of the lighter green areas on 10 occasions. In any particular quarter of the forecast period, GDP growth is expected to lie somewhere within the fan on 90 out of 100 occasions. And on the remaining 10 out of 100 occasions GDP growth can fall anywhere outside the green area of the fan chart. The fan suggests that growth around election time in 2015 will be in the interval of 4.5 per cent at best and minus 1 per cent at worst with the so-called central projection around the probably unreachable  2 per cent. Even this bullish forecast implies the level of output at the start of the recession will not be restored for seven years, making this the weakest recovery in more than a century.  Interestingly the MPC does not share the view of the make-believe recession deniers that GDP growth will be revised up significantly. The black line to the left of the vertical dotted line is the official ONS forecast and the fan around it is the “backcast”; the fact that the green area above the line is roughly the same as the green area below it means that the MPC believes the chances that the data will be revised up are approximately the same as the chance it will be revised down. 

The chances are that even this forecast will be revised down as almost all the previous ones have been. The table sets out the MPC’s growth forecast for the second quarter this year, next year and in 2015.  The first forecast for this year’s second quarter was made in May 2010 and, as time moves on, a quarter is dropped and a new one added. For some strange reason it doesn’t publish the most recent exact numbers in the current forecast for a while, so they have to be interpolated off the chart with a ruler and pencil. It looks like the latest forecast for last year’s second quarter is around 1 per cent and for this year around 1.5 per cent – well below the forecast the MPC made of 2.54 per cent for both only nine months ago.

I was also struck by one highly hawkish and false claim in the Inflation Report: “The amount of downward pressure that those seeking jobs place on wages is likely to diminish the longer they have been unemployed, as their skills erode.” There is no evidence that the long-term unemployed impose any less pressure on wages than do the short-term unemployed. Wages remain the dog that hasn’t and isn’t going to bark.

It makes sense that the MPC, just like the Swiss National Bank, continues to ignore any suggestion that it should tighten monetary policy any time soon. Perhaps those who want to raise rates should spend a little time at altitude to get them back to the real world where ordinary people live.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Cleaner

£15000 - £16500 per annum: Recruitment Genius: If you've got first class custo...

Recruitment Genius: Mobile Applications Developer / Architect - iOS and Android

Negotiable: Recruitment Genius: This is a great opportunity to join a medium s...

Recruitment Genius: Telesales Account Executive - £40K OTE

£11830 - £40000 per annum: Recruitment Genius: Working in a friendly, sales ta...

Recruitment Genius: Web Designer

£15000 - £27000 per annum: Recruitment Genius: One of the UK's leading web des...

Day In a Page

Read Next
David Cameron gives a speech at a Tory party dinner  

In a time of austerity, should Tories be bidding £210,000 for a signed photo of the new Cabinet?

Simon Kelner
Prime Minister David Cameron says his party must not ‘remain neutral’ in the EU membership referendum  

Greece might just have gifted David Cameron with EU referendum success

John Mullin
John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
Football Beyond Borders: Even the most distruptive pupils score at homework club

Education: Football Beyond Borders

Add football to an after-school homework club, and even the naughtiest boys can score
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

Nick Bollettieri's Wimbledon Files

Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

‘This is one of the best McLaren teams ever – we are going to do it’

Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most