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Home Current Affairs Interest rates to remain at 5% in classic stagflation trap

Interest rates to remain at 5% in classic stagflation trap

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The Bank of England Monetary Policy Committee has decided to leave the interest rate at 5%, unchanged for the past five months. Is this the right figure? Some say it is too high and will make the forthcoming recession worse. Others say it is too high and will aggravate inflation. Both views are correct.

The fall in the pound on foreign exchanges is itself inflationary as it makes imports cost more. Whatever the MPC does will be wrong, and so, like terrified animals caught in the middle of the road in the headlamps of an oncoming car, they do nothing. The present situation is one that should never have arisen.

The initial mistakes were made before Labour was even elected. It quickly became evident that the economic success of the period immediately after Labour was elected was normal recovery from the depression of the early 1990s, but the government claimed the credit. There was nothing in Labour's policy that would prevent recovery turning into boom and then bust, over the familiar 18 year cycle. The government might have been able to cope had the government run a budget surplus during the boom years, but the urge to spend was irresistable. There was also a foolish belief in the notion that boom and bust could not occur again as the government had finally mastered the art of achieving sustainable growth.

It was also a grave mistake to think that interest rates alone could be used to manage the economy and keep inflation within agreed limits over a long. It was also a grave mistake to cook the inflation index so as to exclude house prices. Had these prices been included in the index, then at least there would have been a warning of what was about to burst out. Would the Conservatives have done any better? There is no reason to think so.
 


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