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

Junior Quant Analyst - C++, Boost, Data Mining

£25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

Service Desk Analyst- (Desktop Support, Help desk)

£25000 - £35000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

Junior Quant Analyst (Machine Learning, SQL, Brokerage)

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...

UNIX Application Support Analyst- Support, UNIX, London

£45000 - £55000 per annum: Harrington Starr: UNIX Application Support Analyst-...

Day In a Page

Read Next
Mosul dam was retaken with the help of the US  

Air strikes? Talk of God? Obama is following the jihadists’ script

Robert Fisk
 

Next they'll say an independent Scotland can't use British clouds...

Mark Steel
Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

Waxing lyrical

Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
From slow-roasted to sugar-cured: how to make the most of the British tomato season

Make the most of British tomatoes

The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

Mackay, Moody and another grim day for English football

The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
La Liga analysis: Will Barcelona's hopes go out of the window?

Will Barcelona's hopes go out of the window?

Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape