David Blackburn

The politics of interest rates

The Bank of England’s inflation report will be published later this morning, which will reveal how strong the bank believes the recovery to be. All eyes will be on its estimate of the remaining ‘slack’ in the economy, which will govern policy on interest rates. The bank’s Monetary Policy Committee has already said that the bank may have to raise rates earlier than expected if strong growth is creating inflationary pressure. City analysts appear to be working on the basis that rates will increase in the first quarter of next year; but there are rumours that the decision might have to be brought forward to the last quarter of this year, such is the speed of growth.

There was a time when it was assumed that interest rates would not rise before the general election, so there has been little consideration, at least on Fleet Street, of how such a decision might be sold to the public in the prelude to an election. The obvious route to take is that an increase in interest rates is a reflection of Britain’s renewed economic strength; it is an endorsement of long-term government policy and the recovery, as well as being a blessed relief for beleaguered savers and pensioners (who are, of course, likely to vote). But such an endorsement does not mean that the recovery is secure. The bank is adamant that any rise in rates will be modest and gradual; the bank forecasts that inflation will remain around the 2 per cent benchmark for a couple of years, through a period of what the OECD describes as ‘above-trend’ growth. This approach to interest rates allows George Osborne to have his cake and eat it.

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