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

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

Recruitment Genius: Senior Digital Marketing Consultant

£28000 - £45000 per annum: Recruitment Genius: A Senior Digital Marketing Cons...

Recruitment Genius: Assistant Stores Keeper

£16640 - £18500 per annum: Recruitment Genius: An Assistant Stores Keeper is r...

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Software Developer - C# / ASP.NET / SQL

£17000 - £30000 per annum: Recruitment Genius: Developer required to join a bu...

Day In a Page

Read Next
 

General Election 2015: The SNP and an SMC (Salmond-Murdoch Conspiracy)

Matthew Norman
A voter placing a ballot paper in the box at a polling station  

General Election 2015: Despite all the seeming cynicism, our political system works

Ian Birrell
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living