The Bank of England would destroy the "last vestiges" of its credibility if it raised interest rates this week, according to new analysis which counters suggestions that rising prices will force policy-makers to act soon.
Persistently over-target inflation – currently at 4.5pc – has led to speculation that the Bank will soon have to move to slow the pace of price rises, in order to maintain people's faith in its commitment to meeting the 2pc target set by the Government. However, switching gears now would mean the Bank is effectively admitting that past policy has been inappropriate, said Stephen Lewis, the chief economist at Monument Securities.
His argument is that if the Monetary Policy Committee members raised interest rates at their meeting this week, it would throw into question their past inaction, given that inflation has been over target for more than a year and the economy previously looked in better shape to take a hit from higher rates.
"It is hard to see how the MPC majority could now concede a rate increase without admitting that their economic analysis had been flawed from the outset," Mr Lewis said. "If a rate increase was not justified last year, when economic demand appeared to be rising satisfactorily, why should it be justified now that demand is slowing alarmingly? It could only be on the basis of the MPC's recognition that inflation was running out of control. For the MPC to reach that conclusion would be tantamount to an admission that the Bank's policy had all along been misguided."
He dismissed the suggestion that the Bank could argue waiting to raise rates has allowed the recovery time to get on track, since the economy seems to be "slipping back".
The analysis from Mr Lewis, who is in the growing camp forecasting rates will not rise this year, will strengthen expectations that the MPC will not alter policy when they conclude their monthly two-day meeting on Thursday.
The nine rate-setters sitting on the committee have recently been split six against a rate rise, three in favour – but the minority camp has just lost its most vocal advocate.
Andrew Sentance, the first member of the MPC to start voting for rates to rise from their record 0.5pc low, departed at the end of May. He has been replaced by Ben Broadbent, a former Goldman Sachs economist, who is thought to be less inclined towards higher rates.
The European Central Bank is likewise expected to not raise its key interest rate this week, having lifted it for the first time since the financial crisis in April – by 0.25pc
Source: Raising interest rates now 'would destroy Bank of England's credibility' - Telegraph
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AtW's comment: one thing that we can be certain apart from taxes and death (in this order), is that BoE's credibility can not be destroyed any more.
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