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Does the new Governor want higher inflation?
Mark Carney, the next Governor of the Bank of England, has set the cat among the pigeons by suggesting that central banks in countries with low interest rates and weak economies might need to abandon targeting inflation in an effort to spur growth. He did not refer specifically to the UK but, given that he will be carving his initials on Sir Mervyn King’s desk in July, it is hardly surprising if people are taking his suggestion seriously.
Under the Bank of England Act of 1998, the main objective of the Bank is “to maintain price stability”. That is set at a CPI inflation target of 2%, though many of us may argue that aiming to debase our currency by 2% a year is hardly “stability”. In any case, the Bank has been atrocious at keeping inflation to this target – deliberately, say some commentators – hence the Chancellor’s folder full of apologetic letters from Merve.
Will the Bank of England’s remit change?
Testifying last week before the Treasury Select Committee, George Osborne professed himself “glad” that Carney had raised the subject, calling the idea “innovative”. “There is,” he said, “a debate about the future of monetary policy, not exclusively in the UK, but in many countries. There is a lot of innovative stuff happening around the world… I am glad that the future central bank governor of the UK is part of that debate.”
Hardly were the words out of Mr. Carney’s mouth than the US Federal Reserve announced that it would continue with its zero interest rate policy until U.S. unemployment fell to 6.5%, as long as inflation was no higher than 2.5%. It also massively extended its QE3 programme, adding another $45 billion a month to the current $40 billion.
Uncorking the inflation genie’s bottle
To savers, pensioners and the tens of millions of Britons whose wages have not kept pace with rising prices, inflation has resulted in a marked drop in living standards in recent years. If the Bank had kept to the inflation target, prices should have risen only 10% in 5 years. Instead, both the CPI and RPI record rises of 18%, a period in which average earnings rose only 10%.
For the poorer-off and pensioners, whose food and energy bills are a larger proportion of their outgoings, the situation is even worse. CPI food indices are up 30% in five years, while the index for electricity, gas and other fuels has climbed a massive 50%.
No wonder people are feeling poorer.
Debating monetary policy
Whatever the Chancellor says, there has been almost no real debate on monetary policy. There is an almost universal belief among mainstream economists and politicians that it is right to cut interest rates to the bone, print more QE money and try to get people who are heavily indebted to take on more debt and buy things. The only debate among these people appears to be how much more money to print.
Surely after £375 billion of QE, four years of bank rate at a record low of 0.5%, a massive drop in the pound and the government spending £600 billion more than its income, the debate should be on the topic: “Why are these policies not working?” Low interest rates are not the solution; they are the problem. The authorities have opted for pain relief instead of cure.
Not every central banker agrees
However, two central bankers last week challenged the orthodox view. Norman Chan, the Hong Kong Monetary Authority’s Chief Executive said that “quantitative easing is not a panacea… There is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices… Since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient. As a result, households are unwilling to increase spending and in the end, the real economy fails to rebound.”
And the Reserve Bank of Australia Governor, Glenn Stevens, said: “Central banks can provide liquidity to shore up financial stability and they can buy time for borrowers to adjust, but they cannot, in the end, put government finances on a sustainable cours… They can’t shield people from the implications of having mis-assessed their own lifetime budget constraints and therefore having consumed too much.”
They are only two voices among many. But they are voices from economies which have weathered the financial crisis better than most.
A very dangerous road
UK banknotes carry the legend “I promise to pay the bearer”. This promise is wearing thinner with every passing month. The pound has lost 95% of its purchasing power over my lifetime alone. Strip away all the jargon about concentrating on targets other than inflation and the essential message is: “It’s not working. We’re panicking. Let’s print more money.”
That central bankers and politicians are considering debasing the pound still further in a vain and futile attempt to stave off the consequences of their own actions beggars belief and must be challenged. If they travel down this road, they will hit an obstruction and run full tilt into a barrier made of all those tin cans that keep being kicked down the road.