The Bank's over-riding rule for 20 years now has been to target a particular rate of inflation, set at 2% on the consumer price index for the last decade. Before the crisis, this goal had become consensual. Easy to grasp and simple to monitor, the approach initially avoided the perversities which had dogged earlier targeting of the monetary base and the exchange rate. But after 2008, the cost of living began to be dictated by things like global commodity prices, over which
But six recovering months later, and joblessness has probably already breached that threshold, rendering it irrelevant. Meanwhile, a strengthening pound has arrested inflation, so - for now - the original rule book is suddenly less of a problem. Despite the Carney claim yesterday that "forward guidance has worked", it is left looking like an unnecessary disruption. The Bank's attempts to shift the emphasis from unemployment to a broader mix of labour market metrics did not impress, since all of them confirm the recovery's strength; its new stress on the output gap - the most known of unknowns in economics - represents the antithesis of transparent targeting.
Carping over such details is, however, less useful than stepping back and asking how rate-setting got tangled up with unbending rules in the first place. Amid the great inflation of the 1970s, there was a sense that governments could not be trusted to keep a lid on prices, and boffins provided intricate proofs of why rate-setters with free hands would never get a grip. Such theories may still stand, but that was then - a time of strong unions, who could answer every price rise with spiralling wage claims - and this is now. Today's downtrodden workforce has no capacity to fight back in the face of inflation, which is why pay packets have been getting eaten up by inflation for years on end. A more instructive comparator for today is the aftermath of the Great Depression, when interest rates were cut and then left virtually untouched for two decades.
Things might turn out differently this time - rates are lower than in the 1930s, and the great experiment of quantitative easing could yet have inflationary consequences. There are also real concerns - see our Guardian/ICM poll - about a new housing bubble, although bursting this with a rate rise that could ruin untold thousands of over-stretched homebuyers, and also do for the industrial recovery, would seem reckless in the extreme. Especially when - as
A rate rise just now could, as
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