Comment: Slow inflation should stall rates action

Bank of England governor Mark Carney’s suggestion in the summer that the case for a possible rise in interest rates would come into sharper relief around the end of this year begins to look premature. Inflation slipped back to zero in August compared with 0.1 per cent in July. Apart from a brief dip into technical deflation last April, the consumer price index (CPI) has trod water around zero for much of the year.
Governor of the Bank of England, Mark Carney. Picture: GettyGovernor of the Bank of England, Mark Carney. Picture: Getty
Governor of the Bank of England, Mark Carney. Picture: Getty

So-called core inflation, excluding volatile items such as food, energy, alcohol and tobacco, also fell last month to 1 per cent from 1.2 per cent in July.

If it isn’t broken, do not fix it, urge opponents of any rate rise from historical lows.

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And with each new negligible inflation figure it is hard to argue with them. Why even slightly risk damaging Britain’s economic recovery by raising rates, even modestly and slowly, when there looks little danger of the economy overheating?

We may not be in the idealised Goldilocks economy of the pre-crash – not too hot, not too cold – but generally things do look benign even with the clouds from China, the emerging markets and the eurozone.

Our pivotal services industry continues to perform well, even with the odd blip. Manufacturing may be hobbled by the relative strength of sterling and the weakness in its main European market, but is far from on the ropes.

Unemployment is low; business investment is decent if not stellar. We have growth in real wages, but factors such as the low oil price are outweighing it in the general inflation picture.

As things stand, it would even seem vaguely doctrinaire if Carney and the Bank of England’s monetary policy committee (MPC) tightened monetary policy now.

Any such move – mainly championed by the arch MPC hawk Ian McCafferty – could almost seem like an atavistic desire by the Bank for a return to the conspicuous “normality” of slightly higher rates, rather than being based on practical considerations.

The time factor, rates being at historical lows for six years now, should be irrelevant in deciding when to tighten policy.

As the oil price eventually rises it is likely that inflation may lift to nearer 1 per cent. And, although that shouldn’t come any time soon, even when it does it would be in no way an unanswerable argument for raising rates.

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Good economic policy is as much knowing when to do nothing as when to grasp the levers. Low inflation from petrol pump to gas bills, from food to footwear, and the wild card of global economic uncertainties, both suggest a period of Palmerstonian “masterly inactivity” is appropriate from the Bank.

On the facts currently, far from expecting a sharper focus on the level of interest rates in a few months time, any rise could be well into 2016.

Labour finance chief comes from left-field

Labour’s shadow chancellor John McDonnell listed his hobby in Who’s Who as “fomenting the overthrow of capitalism”. If the party ever gains power it will make his appearances before the Treasury select committee red letter days.

It could also spawn an increase in the letters to the Chancellor that committee chairman Andrew Tyrie “places in the public domain”, not with the express intention of adding to the gaiety of the nation. Ditto McDonnell’s visceral distrust of bankers. I think the business world is nonplussed.