Follow:
 |
© 2012 Deloitte LLP. All rights reserved. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity.
Please see About Deloitte for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its Member Firms. View our accessibility statement.
Get in touch
Pause may not be the last of QERoger Bootle’s response to February’s MPC meeting |
- Faced with a sluggish recovery but sharply rising inflation, it was unsurprising that the Monetary Policy Committee (MPC) decided to sit back today and leave monetary policy unchanged. But I think that later this year, when inflation is falling sharply and the recovery is still struggling, the Committee may have to step in again to provide more stimulus.
- Even if the Committee wanted to give the economy more support this month, it would have been difficult to do so from a presentational point of view. This month’s inflation figures should show CPI inflation reaching 3.5% or even higher in January, meaning that the Governor will have to write an explanatory letter to the Chancellor explaining why inflation is over 1% above target. Writing that letter just after pumping even more money into the economy may have looked complacent, or at least risked stoking inflation expectations.
- But the rise in inflation should be short-lived. I still think that the huge amount of slack in the economy will take inflation to very low levels next year. The economy is barely growing, let alone growing fast enough to use up the large amount of slack – as the Committee acknowledged today in the statement alongside its decision.
- Indeed, the UK has been at the back of the pack during the early stages of the global recovery and that’s unlikely to change. After exiting recession at the end of last year at a snail’s pace, there is every possibility that the UK relapses at the start of this year. The VAT rise, the disruption caused by the snow and the imminent end of the car scrappage scheme all mean that the economy is starting the year at a disadvantage.
- In addition, cracks are starting to show in the housing and labour market recoveries. Mortgage approvals fell in December for the first time in over a year. And although employment started to rise towards the end of last year, it posted a renewed fall in the three months to November.
- Indeed, although it’s hard to believe when inflation is so far above target, deflation is still a major threat. Accordingly, I very much doubt that this month’s pause is the first step towards the MPC tightening policy any time soon. In fact, if policy is changed this year, it is more likely to be loosened further.
- Indeed, the Committee said today that “further purchases would be made should the outlook warrant them.” What’s more, there are still other options. I continue to think that cutting Bank Rate further and/or reducing the rate paid on banks’ reserves could now be the way to go.
- Markets have scaled back their expectations for interest rates a bit, but still think that they could get to 1.5% or so by the end of this year. In contrast, I expect them to remain at 0.5%. What’s more, I reckon that they will stay at 1% or below for five years.
Roger Bootle, Economic Adviser to Deloitte (Tel: 020 7823 5000)
Ends
Notes for editors
This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte. If you have any questions regarding the views in it, please contact Roger Bootle directly on 07887 955 875 or 020 7823 5000 or via email on business@capitaleconomics.com.
This press release contains general information only and is not intended to be comprehensive nor to provide professional advice. It is not a substitute for such professional advice and should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication.
About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.
Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk\about for a detailed description of the legal structure of DTT and its member firms.
The information contained in this press release is correct at the time of going to press.
Last Updated:
Media contacts
- Name:
- Jamie Harley
- Company:
- Deloitte LLP
- Job Title:
- Head of Media Relations
- Phone:
- +44 (0) 20 7303 5037
- jaharley@deloitte.co.uk