David Smith has an
interesting piece today about the Bank of England. The Bank kept
rates on hold at its last meeting, but it could easily have hiked: the markets
were on tenterhooks as the annoucement approached. (When was the last time you
could say that about the ECB or the Fed?)
The BoE operates under an inflation-targeting system, and inflation is high
in the UK at the moment, mainly because of a one-off spike in UK energy costs.
Says Smith, a little waspishly:
Perhaps we have reason to be grateful to the utility firms, farmers and food
retailers, and even to the government for increasing university fees. Why
so? In the absence of above-target inflation it would have been harder for
the MPC to have raised rates. Yet the economy’s exuberance — strong
growth, buoyant housing and a six-year high for the stock market — justified
at least some monetary tightening.
Some would say, indeed, the Bank’s problem is that it is obliged to
focus on the inflation target when a more rounded approach to monetary policy
might suggest higher interest rates.
MPC members, of course are going to try their best to set the best monetary
policy they can, while at the same time thinking first and foremost about their
inflation target. If asset prices are skyrocketing and GDP figures are coming
in strong, however, then they might find it just a little bit easier,
all other things being equal, to hike rates. That’s the good thing about having
a rate-setting committee made up of humans. You can give them as narrow a mandate
as you like, but if they’re smart, they’re still going to see the bigger picture.