Leading article: The Bank is right to do nothing now

Related Topics

We won't know how the members of the Monetary Policy Committee of the Bank England voted yesterday until the minutes are published in a few weeks' time. But it is a fair bet that they were deeply divided over whether to start raising interest rates or whether to hold them. And so they should have been. The issue of rates is one of the most fraught questions facing the economic authorities today, and the most uncertain.

In the end the Committee decided to keep them once more on hold, as they have for the past 18 months. And they were right to do so. The recovery, although strong in the second quarter, is a fragile one. Most of the latest indications on house purchases, consumer confidence and car sales point to a weakening of demand and output. At the same time, the Bank of England has had to consider the wider context of a government determined to cut back public expenditure sharply and early. Raising rates at this moment, however marginally, could serve only to dent confidence further and drive a softening economy back into a recessionary one.

Caution, however, should not allow the Bank to minimise the very real problems of inflationary pressure building up in the economy at the moment. The Consumer Prices Index is now running at 3.2 per cent against the target of 2 per cent, as it has done for the past year. Some of the factors are of limited duration. The sharp fall in sterling is now tailing off and the currency is actually beginning to strengthen. The rise in grain prices has been fuelled by the heatwave in Russia, Uzbekistan and Kazakhstan. In the normal course of events, harvests should return to normal next year. Any upward pressure on prices should, on past experience, be held in check by the surplus of capacity and unemployment.

That at least is the theory behind the Bank of England's determined belief that, given time, inflation will come back down below its target rate next year. The trouble is that the Bank keeps saying this and keeps predicting an early fall in prices, but this has so far obstinately refused to happen. Currency depreciation may be partly to blame, but there are also more persistent underlying factors, not least the rise in commodity prices pulled by Asia's return to high growth. Grain, and hence food prices, may indeed fall back next year. In the meantime, however, they will be rising just as UK inflation is boosted by the increase of VAT to 20 per cent.

The fear is that, left unchecked, these cost pressures will work their way into public expectations, increasing wage demands and encouraging consumers to hunker down in their spending. Economically, persistent inflation can have a devastating effect over the medium term, as Britain of all countries has reason to know from its past. Politically, too, the impact on people's real incomes, their savings and their general optimism could be extremely damaging.

This is the tightrope that the Bank must now walk. On the one side there is the real terror of a double-dip recession, hastened on its way by rate rises. On the other side there is the nagging concern that inflation has gone on too long, and that the Governor of the Bank has had to write too many letters of explanation, for it be ignored any longer. Two years ago the Bank made the mistake of leaving it too long to lower rates in the face of the coming crash and had to act precipitately in consequence. It doesn't want to make the same mistake the other way round.

If George Osborne had not announced such savage reductions in public expenditure, the Bank might well have had to raise rates now. As it is, the prospect of budget cuts, the VAT rise and the signs of weakening growth have encouraged it to err on the cautious side. It will need to explain the reasons, however, if it is to hold rates, as it would like, through the medium term.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Project Implementation Executive

£18000 - £23000 per annum: Recruitment Genius: They work with major vehicle ma...

Recruitment Genius: Chiropractic Assistant

£16500 per annum: Recruitment Genius: A Chiropractic Assistant is needed in a ...

Recruitment Genius: Digital Account Executive - Midlands

£18000 - £26000 per annum: Recruitment Genius: They work with major vehicle ma...

Recruitment Genius: Web Developer

£28000 - £30000 per annum: Recruitment Genius: This company provides coaching ...

Day In a Page

Read Next

Errors & Omissions: how to spell BBQ and other linguistic irregularities

Guy Keleny

South Africa's race problem is less between black and white than between poor blacks and immigrants from sub-Saharan Africa

John Carlin
NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own