Dated: 5 April 2011
Ahead of Thursday’s Monetary Policy Committee (MPC) meeting, the Institute of Directors sets out its position on interest rates:
1) Inflation will fall in 2012 as oil, commodity and VAT effects fall out of the year-on-year calculation. Raising interest rates now will have little or no impact on 2011 inflation, but very considerable impact on current growth.
2) The outlook for interest rates is on a knife edge and we are very concerned that the MPC might opt for a rate rise. Whilst everyone is focussed on potential mistakes in fiscal policy – wrongly in our view – we think there is a greater danger from a mistake in monetary policy.
Commenting, Graeme Leach, Chief Economist at the IoD said:
“Yes, inflation is well above target, but there is little or no evidence of the wage-price spiral that would spook the MPC. There is another consideration as well, namely the anaemic growth in the money supply. To raise interest rates against the backdrop of flat or falling money supply would surely risk a double-dip.
“We think the MPC would be correct if it continued to see through this year’s inflation peak, confident that the headline rate would fall back next year. Raising interest rates now won’t have any impact on oil and commodity price pressures. The only way to squeeze UK inflation in 2011 would be to raise interest rates to such a degree that we flip the economy back into recession. Why do this when the headline rate will fall next year anyway, due to year-on-year effects?”