Interest Rates Could Rise To 7.5pc
As we draw closer to the local elections, a group of prominent economists have today put forward their argument for higher interest rates in an open letter to the Bank of England in which they state that inflation risks could surge out of control if the Bank does not raise rates soon and quickly.
Tim Congdon, Gordon Pepper and others have said that broad money (known as M4, and currently rising at 12.8% per annum) points to much higher inflation next year. Congdon told the Telegraph:
“Inflation is back and it’s going to get to 4pc by the middle of the next year, even though I expect the CPI to fall back a little over coming months first.
“You can’t get away with money supply growth of 12pc or 13pc like this. It’s not as bad as earlier cycles, but it is nevertheless bad and it’s going to end the usual way. Rates will have to go to 6pc to 6.5pc, and may have to reach 7.5pc,”
Mervyn King is also concerned about M4, in opposition to other MPC members such as David Blanchflower who believe monetarism is dead and buried.
Mervyn King told the Commons Treasury Select Committee last month that he was watching the money supply closely. “I’m more concerned with monetary aggregates than some of my colleagues. To ignore it as a potential influence could lead into tricky territory.
“My concern about the money numbers is whether they are telling us something about the inflation numbers not in two years but in maybe three to five years,” he said.
Mr King’s comments were a veiled criticism of the doveish faction on the MPC, many of them political appointees picked by Chancellor Gordon Brown. Insiders at the Bank are said to be particularly scathing about the choice of David Blanchflower, best known for his academic opus Money, Sex and Happiness, an area of research viewed as frivolous by monetarists.
It remains to be seen whether the CPI measure will fall back to target later this year as the MPC has forecast, but they will be looking further ahead than that in making their rate decisions, and if the opinions of these economists are anything to go by, rates could have to go quite a bit higher than Gordon wants. They are already paying the price for failing to raise rates quick enough in 2006, and now rates will have to go higher for longer. With the “low inflation” pillar of his potemkin economy crumbling and about ready to collapse, how long will Gordon last in number ten?
