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

**Primary Teachers Needed Urgently in Southport**

£80 - £120 per day: Randstad Education Liverpool: **Due to an increase in dema...

SEN Teaching Assistant Runcorn

£50 per day: Randstad Education Cheshire: SEN Teaching Assistant EBD , Septemb...

Nursery Assistant/Nurse all cheshire areas

£7 per hour: Randstad Education Cheshire: We are a large and successful recrui...

SEN Teaching Assistant

£50 per day: Randstad Education Cheshire: SEN Teaching Assistant We are curr...

Day In a Page

Read Next
Nigel Farage has urged supporters to buy Mike Read's Ukip Calypso song and push it up to the No 1 spot  

Mike Read’s Ukip calypso is mesmerisingly atrocious — but it's not racist

Matthew Norman
Shirley Shackleton, wife of late journalist Gregory Shackleton, sits next to the grave of the 'Balibo Five' in Jakarta, in 2010  

Letter from Asia: The battle for the truth behind five journalists’ deaths in Indonesia

Andrew Buncombe
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London