Bank of England chief economist and executive director Spencer Dale has warned off any detractors of the Monetary Policy Committee’s current direction and says inflation is very much still its primary concern.
Speaking at the Cardiff Business School last night, Dale said talk of the Government trying to “deflate away” some of the public debt was false and the main policy for the MPC was still “inflation, inflation, inflation”.
He said: “One of the most worrying comments I have heard in recent months came at a lunch of senior businessmen I attended who suggested that the UK was returning to its old ways of depreciating the exchange rate and inflating its way out of trouble. Soon after, a City circular asked ‘is the MPC turning a blind eye to inflation?’
“This is dangerous talk. The evils of inflation are well known. The high and volatile rates of inflation of the 1970s and 80s stunted our economic performance.”
Dale admitted that, while inflation has not reached the heights of the 1970s, there was still cause for concern as the Consumer Price Index has remained above target for 41 out of the last 50 months. But he said there are explanations to explain high inflation, namely spare capacity in the economy, weakening Sterling and tax changes.
But Dale said inflation expectation – the affect of businesses’ expectations of inflation – is equally as important a factor. He said if talk of enforced inflation is believed, it makes the job of the MPC more difficult.
He said: “The risks to the inflation target are real and substantial. The job of monetary policy is to try to balance these upside and downside risks to inflation. In essence this is no different to normal, monetary policy is always faced with a balancing act. But what is different is that the current risks to inflation are unusually large.”