David Prosser: The Bank's impossible balancing act

Wednesday 11 August 2010 00:00
Comments

Outlook It is in this context that Mervyn King, the Governor of the Bank of England, presents his quarterly Inflation Report today. He faces a difficult balancing act. On the one hand, Mr King will be acutely aware of the nervousness about the prospects for growth. On the other, he runs an institution that is mandated to hit an inflation target of 2 per cent, but which hasn't yet managed to bring the rate below 3 per cent this year.

The Bank's public utterances on inflation have at least been consistent. It insists that the consumer price index will, in time, fall back towards the 2 per cent target. In the meantime, the traditional response to inflation, an interest rate increase, is not appropriate for an economy still fighting its way back from the worst recession in living memory.

There are two problems with this analysis. First, there is no sign of the Bank's prognosis being proved right any time soon. Commodity price rises are the immediate threat, but there are reasons to worry further out too – the VAT increase planned for the New Year, for example. Second, the perception of the Bank's competence in the battle against inflation is just as important as its actual performance. There is a limit to how long Mr King can go on promising inflation will eventually come back within range without losing his credibility if it doesn't happen.

Are we at that limit yet? Probably not quite, though one reason why Andrew Sentance, the Monetary Policy Committee member, keeps voting for a small interest rate rise is that he wants to demonstrate that the Bank is still serious about tackling inflation.

The sniping has begun, however. This week alone, for example, there have already been a series of reports carping about the new forecasting model that the Bank is currently building (the implication being that the old one didn't work). The balancing act is getting tougher by the day.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Please enter a valid email
Please enter a valid email
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Please enter your first name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
Please enter your last name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
You must be over 18 years old to register
You must be over 18 years old to register
Opt-out-policy
You can opt-out at any time by signing in to your account to manage your preferences. Each email has a link to unsubscribe.

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in