Today’s Monetary Policy Committee (MPC) minutes all but confirmed what many economists had already suspected – that UK interest rates are not going to rise at all this year, and could even stay on hold throughout 2012.
This is good news for the thousands of households and businesses that are still yet to see much benefit from the admittedly tepid UK economic recovery, although savers will again be disappointed.
The minutes showed that, having been split throughout the rest of the year, the MPC voted unanimously to keep Bank Rate on hold at 0.5% in August. (At the same time, there is little prospect of further stimulus, as Adam Posen is still on his own in voting for more quantitative easing.) As recently as May, three members of the nine-strong Committee were opting for rate hikes. Now no one is. This is an encouraging sign that economists, unlike some politicians, are not averse to u-turns.
Of the three hikers in May, one – Andrew Sentance – has left the Committee. As I said at the time, Sentance’s stance, which was to argue for a more rapid pace of tightening than the MPC has ever opted for, looked a bit like a set pre-position. Just as Danny Blanchflower has made much of his dissent in voting for low rates in the run up to the recession, Sentance’s move had a hint of setting himself up for an ‘I told you so’ moment, especially with inflation likely to stay high throughout this year and probably only get back towards target in late 2012 at the earliest. There was never much prospect of the rest of the Committee agreeing to raise rates as fast as he wanted.
The other two hikers, Martin Weale and Spencer Dale, are still on the MPC. But their approaches have been remarkably different. While Weale started to vote for a modest increase in interest rates in January, he has been very consistent that in his view the decision was finely balanced, and subject to change. In particular, a friend of mine who heard him speak recently reported that he had explicitly said that if growth came in weaker than expected, he would stop voting for rate increases. Growth has, of course, been weak, and in following Keynes himself – ‘when the facts change, I change my mind’ – Weale has actually been pretty consistent in his analysis and decisions.
In contrast, Spencer Dale has done things a bit differently. At a speech in March, he explicitly said that his decision to raise rates was despite a weak outlook for growth. Instead, the two factors he cited as the key upside risks to inflation were continued global price pressures and the increasingly long time that inflation had been above the 2% target. Both of those two factors are still with us today – yesterday’s data revealed that CPI inflation was 4.4%Y/Y in July – so Dale should still be voting for rate rises. Unlike Weale, his thinking and analysis appears to be inconsistent.
Personally, I find this a bit worrying. Markets (and other economists) want policymakers to take their decisions on a consistent basis, so that they can understand how policymakers think and what they put emphasis on. And there is no harm in being wrong sometimes, especially if the mistake is promptly rectified when evidence emerges. But setting out clear reasons for your decision, and then doing something different instead, is not particularly helpful. Not for the first time, better communication – and perhaps a bit more humility – seems to be the order of the day at Threadneedle St.