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MPC member defends stance in the face of rising inflation

A MEMBER of the Bank of England committee that sets interest rates has defended its performance in spite of the rising cost of living which is putting pressure on households and businesses.

Paul Fisher told the Yorkshire Post that the Monetary Policy Committee's decision to reduce rates to an all-time low helped the UK economy to weather the worst of the recession.

"The decisions we took through 2009 are the ones that are determining inflation rate now and nobody so far has said we should have had tighter policy through 2009 – that was the period output was falling, we were trying to bring the recession to an end," he said.

"Yes it's very uncomfortable – inflation is four per cent now – but I wouldn't want to go back and change policy."

He said analysis suggested that the current levels of inflation were due to short-term factors, such as the VAT rise, petrol, food and commodity prices.

Mr Fisher added: "The reason the central bank is given the job of targeting inflation is because we can make long-term decisions which politicians find difficult. We have to look through those short-term things, despite whatever unpopularity comes our way, to try and set the best policy rates for the medium term.

"That's why you have a conservative central banker setting monetary policy."

The MPC has faced criticism over its failure to predict inflation over the last three years.

Asked if the Government would be better at setting interest rates, Mr Fisher said: "They have the right to take it back from us if they want. I doubt very much they would wish to exercise that right."

The economist, who is the Bank's executive director for markets, said the most likely source of shocks to the UK economy come from abroad. He added: "There are risks everywhere you look around the world, but I'm reasonably optimistic about the UK's own position."

In the eurozone, Mr Fisher said an intensification of the sovereign debt crisis in a particular country could affect its financial institutions and have a knock-on effect on the UK banking sector.

He said: "People have been content with the UK's financial position, with the UK banks, so we are not the focus of attention.

"But if you have a big financial stability event, as we saw with Lehmans, every banking system in the world suffered in the immediate aftermath so you couldn't rule out some spillovers."

He said a banking failure in Europe was "not the most likely case". He added: "The authorities across those countries are fully aware of the risk and will be trying to do what they can. We want to get to a position where we could actually allow large financial institutions to fail but quite a lot of policy work needs to happen before we can convincingly say that's the case and in the meantime I would imagine that the relative authorities in those countries will do everything they can to prevent it."

Other risks to the UK economy come from rising inflation or a slowdown in growth in the Far East and the United States' struggle to achieve economic growth to offset heavy unemployment.

Mr Fisher said international banking reforms were making good progress, while reforms to the UK's financial sector have "come a long way". He said: "Obviously, we want to get the UK banking system to be one of the strongest systems in the world so as the Bank of England we do want to push for fairly tough regulations on capital and liquidity, but given the state of the economy we don't think you have to rush into that as quickly as some people would like to."

Banks should make use of the ensuing transition period so they can carry on lending to businesses, he added. Mr Fisher said he would settle for those reforms to be complete by 2015-2019.

Asked if he had any concerns about the public spending cuts damaging the UK economy, he said: "The most important thing was we have some sort of fiscal consolidation in which the markets can have credibility. I think we have got that."

Mr Fisher added: "That then has some further consequences, but they are not as important as the first step of having one."

He said double-dip recessions were rare in historical terms. "It's not usual in a recovery unless somebody does something badly wrong in a way that gives you a sudden shock to confidence and we are not planning to do that. The fiscal change will happen over a five-year period, not a sudden shock.

"You can't rule out some risk of negative growth at some stage for a quarter or so. But it's not the most likely scenario. But output can be volatile, so we should not be too surprised to see it continuing to be a bumpy path over the next few years."

Predicting the pressures to come

When it sets interest rates, the Bank of England's monetary policy committee tries to forecast the pressures on the cost of living in two to three years' time, said Paul Fisher, one of the MPC's nine members.

"We can't get over-concerned over the short-term inflation rate over which we can't exercise any great control. It's uncomfortable having inflation above our target. But it's not what drives us from a policy point of view. We have to look at inflation two to three years ahead because that's what we can influence." He would not speculate on how high inflation might rise. He said inflation should peak in the first quarter "but these short-term forecasts are very unpredictable".

 
 
 

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