Bank of England: Victoria Scholar discusses interest rates
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Speaking to Express.co.uk Professor Danny Blanchflower criticised Mr Bailey’s handling in the run up to the decision which saw “a vote of seven to two (against raising rates) when the markets were basically fully pricing in a rate rise”. “He raised expectations and then had many opportunities to pull back on it,” Professor Blanchflower said. Prof Blanchflower served as an external member of the MPC from 2006-2009. Commenting further, he said: “The question you have to ask yourself is is his credibility presumably now shot? He clearly did not consult the other members of the Committee, so you say you’re going to do this, but what about the other members of the Committee, what do they think?”
During the Bank of England’s press conference Mr Bailey was asked if he was becoming unreliable boyfriend number 2, a reference to his predecessor Mark Carney.
In response Mr Bailey said: “We’re in a situation where the calls are close, they’re quite hard.”
“But, you know, that’s just a reflection of the position we’re in.”
“It’s not unreliable boyfriend, we didn’t say we were going to act at any particular meeting.”
Laith Khalaf, head of investment analysis at AJ Bell commented: “No doubt some will characterise this latest decision as the Bank bottling it, but there are pretty sound reasons to hold off on hiking rates right now.
“The Bank’s judgement that inflation is transitory hasn’t really been tested, as it’s only six months that CPI has been marginally above target, and in fact the inflation index fell back at the last reading.”
“Although inflation is now predicted to peak at five percent next April, the data is notoriously unreliable at the moment, thanks to the distortions created by the pandemic, and a synchronised emergence from it in Europe and America.”
Commenting further on the decision Prof Blanchflower agreed that waiting further before increasing rates was the right thing to do given the unprecedented times the UK economy is currently in.
Comparing the current situation to being hit by a hurricane he said: “I don’t understand exactly what’s going on in the labour market so what you should do is wait and watch, see what happens with the labour market, see what happens with all these furloughed workers and down the road maybe make this decision.”
“But there’s nothing to be lost by waiting at a time when we’ve just seen cuts to universal credit, increases to our national insurance so the sensible thing is to wait and watch which is what they’ve done.”
Prof Blanchflower also raised questions over why the Monetary Policy Report made little mention of a decline in self-employment by 750,000 workers.
“This looks like a Governor who’s not really on top of what’s going on,” he added.
In the Bank of England’s report the MPC acknowledged that inflation was likely to peak at around five percent next year and then fall back.
Prof Blanchflower agreed that inflation was likely to be transitory.
He continued: “Is there any reason to believe these increases this year are going to increase next year.”
“Is there any reason to believe that the price hikes that have occurred this year repeat again next year and the answer to that is no.”
“There’s nothing in the data currently to suggest this is anything other than temporary.”
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This view was echoed by the Confederation of British Industry in their reaction to the announcement today.
CBI Lead Economist Alpesh Paleja said: “On balance, the decision to keep interest rates unchanged is the right one.
“The upcoming rise in inflation will likely prove transitory, and there is as yet only patchy evidence of rising prices becoming embedded in both wage-setting and households’ inflation expectations.”
The Bank of England declined to comment further.
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