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A test for the bank of England
The Old Lady has won plaudits since being granted independence. But for how much longer ?
SINCE 1997 , when the newly elected Labour government suprised everyone by making
it independent , the Bank of England has enjoyed what its governor , Mervyn King ,
has described as a " golden period " in its histori During That time . it has presided over an
impressively stable economy that has grown steadily even asothers have haltered .It has got on with its
job of steering monetary policy with quir ehhiciency, common sense and
admirable transparency . Moreover , it has so far managed to do its job without coming to
blows with the Chancellor of the Exchequer , Gordon Brown. As Tony Blair would ruefully
Testify , that is in itself no mean feat .
Unfortunately , this happy state is now threatened . As the requirements of an
overheating economy and a goverment likely to be seeking re-election in May next year
diverge, the months ahead will be trickier for the Bank to negotiate than any since it gained
its independence . It is just the Bank's technical ability that will be tested , but its
fortitude.
In the run-up to hte last election, in 2001, there was no such problem: the economy
was weakening, inflation was subdued znd the government had only just begun to open up
the spending taps. The Bank was happy to rally round with a series of entirely
uncontentious interest-rate cuts. Things look very different today. The latest fihures show that the economy,
boosted by the immense quantities of cash the government has been throwing at public services,
is currently growing at 3,7% a year, its fastest pace for nearly four years. Furthermore , it is quite likely
that these numbers are understating the reality. As additional data become available,
the growth figure could top 4%. At that sort of clip, it will not be long before the British economy is
running at maximum capacity.Employers already report signs of labour-market tightening and business surveys suggest that increasing numbers of firms are expecting to push up prices mjre rapidly next year as dearer oil and commodity prices bite.
Yet despite the warning signals,the minetes of the July meeting of the Banks monetary policy committee (MPC) sounded remarkably complacent.The MPC decided to hold off on an immediate interest-rate ris because of “tentative signs of a slowdown in the housing market», the «possibility» that immigration wa taking some of the pressure out of the labour market and some indications of slowing consumer spending.
However, the evidence for a coolding housing market is at best patchy, given the near- record level ofproperty transactions in June, and consumers seem to have lost none of their appetite for debt.Although another quarter-point hikein interest rates may be announced next week,the fifth such increase since November, nothing the MPC has yet done has had anydiscernible dampening effect on the economy.
Don’t follow Greenspan
Mr. King has already irritated the chancellor by pointing out more than once that, in the absence of higher tax revenues , there is a danger of asking monetary policy to do too much. He is clearly concerned about the impact of over-aggressive rices in interest rates on heavily indebted households. Given that inflation is still low by historic stanards, these are relatively uncharted waters. But buy refusing eitherto restrain spending or to raise taxesduring the run-up to an election , Mr. Brown has backed the Bank into a corner. From the autumn onwaards, any action the Bank takes will have political ramifications . If it has not by then succeeded in slowing the speeding to be a bit less cautions now.Next week , rather than announce another quarter-point rise that few will notice,the MPC should go for a half- point increase with the threat of another one soon if that doesn’t have the to make the desired effect. The example of Alan Greenspan, the chairman of the Feder Reserve , should act as a warning. The Fed should have started raising rates earlier than it did,now the November elections complicate its calculations. Mr. Greenspans reputation may yet suffer, Mr. Kings need not