Thursday, February 24, 2011

Rates must go up

Andrew Sentance, MPC member, again called for higher rates in the face of growing inflationary pressures:

"The time has come to increase interest rates. We should increase them gradually and slowly if we can. But the risk of delaying interest rate rises too long is that this gradual approach may cease to be an option in the future."

Six months ago it might have been possible to gradually increase interest rates. Unfortunately, the Bank of England is so far behind the curve that only a sizable rate hike will have a significant effect on rising prices.

Events in the Middle East have cruelly exposed the 'wait and see" stance of the more passive members of the committee. The sudden surge in oil prices will inevitably push inflation towards the top end of the Bank's inflation projection, at least in the short run. While a fall in the oil price is likely over the medium term, this decline won't come before inflation hits five percent. Indeed, if uncertainty in the oil market is protracted, then inflation could easily hit six percent by summer.

An earlier movement on rates, coupled with an unwinding of quantitative easing, would have put the Bank in a better position to deal the the recent commodity price shocks.

Now, the Bank must make up for the mistakes of the past. Delay will only make the evitable adjustment more painful. Rates must go up.

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