Bank of England plays down prospect of interest rate cut

The Bank of England is making a concerted effort to play down the possibility that it will respond to inflation falling to zero with a fresh cut in interest rates.

Three members of Threadneedle Street’s monetary policy committee separately said that they thought inflation – which is likely to turn negative next month – would bounce back soon.

The interventions by deputy governor Minouche Shafik and two of the externally appointed members of the MPC, Kristin Forbes and David Miles, contrast sharply with comments made last week by the Bank’s chief economist, Andy Haldane. Haldane said it was possible that there had been a permanent downward move in inflation and that he could easily envisage cutting rates from their current record low of 0.5%.

But this view was not supported by Shafik, Forbes or Miles, who made their views public before the Bank goes into “purdah” later this week for the duration of the election campaign. All three echoed remarks made recently by the Bank’s governor, Mark Carney, who said it would be “foolish” to cut rates in response to a temporary fall in inflation.

Shafik, in an interview with Kent Business, said underlying inflation is “not that low” despite the drop in inflation to its lowest ever level on the government’s preferred measure, the consumer prices index. She added that the next move in interest rates was likely to be upwards. “Inflation is below the 2% target we are meant to have achieved, but the real drivers behind that are temporary and mainly external.”

Forbes said in an article for the London Evening Standard: “Low inflation is unlikely to persist because the recent sharp fall in the price index is driven primarily by the sharp fall in energy and food prices. In fact, Bank calculations suggest that around three-quarters of inflation’s deviation from our 2% target can be explained simply by recent price falls in these sectors.”

Meanwhile, Miles, in an interview with the Financial Times, said it would be wrong for the Bank to be panicked into a cut in interest rates because of the current level of inflation. Noting that he saw no deflationary forces holding back the economy, Miles warned against a knee-jerk response, adding that it was “more likely than not” that interest rates would rise. “It’s wise to hold your nerve and not to get panicked into a response to the current [zero] rate,” he said.

Miles said inflation was likely to turn negative in the months to come, but added: “What I don’t see at the moment is persistent underlying deflationary pressures in the UK — they are striking by their absence”.

Powered by article was written by Larry Elliott Economics editor, for The Guardian on Wednesday 25th March 2015 20.44 Europe/London © Guardian News and Media Limited 2010


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