City View: Banking on a Consistent Attitude to Interest Rates
Byline: Nevill Boyd Maunsell
A month ago inflation stood 0.2 per cent above the target Chancellor Brown had set the Bank of England. Indeed, it had over-run the target every month since October, 2002. The pundits concluded all but unanimously that interest rates would go up again sooner rather than later. Yesterday inflation stood an impressive 0.7 per cent below the target. So do the pundits expect the cost of borrowing to be slashed to ward off the threat of deflation? Not a bit of it. They still predict all but unanimously that interest rates are heading higher, probably next month. They praised the Bank for not rushing things. The reason for this paradox, of course, is that Mr Brown moved the goalposts. In his pre-Budget on December 10, he set a new target based on a new index.
While the inflation measured by the old index had been running a little above the old 2.5 per cent target, according to the new index it was well below the new two per cent target and has been for years.
Yet the real world is just as it was. If the Bank was right to be edging the cost of borrowing cautiously higher before, it should be right now. But if Mr Brown thought it was right before -as he boasted at every opportunity -why did he shift the goalposts? It was nothing to do with inflation or interest rates or how to run the economy. He had blocked Tony Blair's fervently desired euro-referendum and needed a political sop to show he was not a rabid anti-European at heart. So he gave us a European inflation index, then re-named it after a few months so nobody would notice. …