I see Tim has gone very quiet on this subject!

Change in monetary policy only affect the real economy with a substantial lag. Therefore those in charge of monetary policy need to be forward looking.

As late as September the MPC minutes stated “most members judged that maintaining Bank Rate at 5% this month was necessary if inflation was to be brought back to the target in the medium term” and that “a case could be made for an increase in Bank rate”.

Yet since the end of 2007 a many forward looking surveys of UK economic activity have indicated a marked downturn. Look at the GFK Consumer Confidence Surveys, the CBI Industrial Trends Survey and the BCC Quarterly Surveys for examples.

In any other profession anyone making such a bad judgement call would be out of a job. For economists the rules appear to be different!

Cutting earlier could have made things worse: lower borrowing costs, more debt, higher house prices, and now bigger problems.

As Hywel says, % are not particularly effective at curbing house prices – or rather, the rates needed to curb the rises over the last few years are high (more than double, on average). That in turn would have raised £ even higher, destroying large parts of the economy. If we want to dampen oscilations in house prices we need supply to respond to demand, just as in the rest of the economy.

Manufacturing output (in volume terms) continues to rise, although rises in productivity mean that manufacturing employment falls. Whether the £ is at $2 or $1.50 makes little difference in competitiveness cf China: our future has to be in the high skills sectors of the economy, mfg or services.

I don’t think we are likely to see unemployment rise in the way of the early 1980s, since there is no obvious need to shake out uncompetitive sectors (finance is much smaller now that mfg, mining etc was then). But peak unemployment may well be higher, because the economy has been poor at finding work for low skilled males, particularly those living outside the SE of England. So we start with more “non-active” males as a baseline.

It seems they agree with you at CentreForum.

http://www.centreforum.org/publications/inflation.html

Playing devil’s advocate – but only a bit, because I think these scenarios are a real risk too many are ignoring.

The experiment carried out by the Bank of England’s monetary policy committee has not worked out well. They did nothing to head off the housing bubble, largely because they were not responsible for it, but they did provide a fig leaf for Gordon Brown to cover up his mismanagement of the economy, and by splitting responsibility into two, allowed him to confuse the issue and pretend all was well.

The need to change the overall control structure back to an integrated one is clear for all to see. Domestic inflation has been allowed to run riot in inefficient service industries which could hide their inefficiencies under fictitious rises in asset values, while manufacturing has gone further to the wall as it is faced with real international competition. Prices of imports have been driven ridiculously low, due to the China effect and the excessive value of the pound. This is now unravelling.

Stagflation may again become an issue as we no longer have a diverse economy, with little manufacturing industry in place to benefit from a falling exchange rate. The wage price spiral will not be the problem; it will be the exchange rate price spiral. I believe there is a real problem here and economists are still fighting the old war (against inflation) and not the new one.
Finally unemployment could surge drastically not like in the 1970s and 80s, but because we are so dependent on financial services to drive the economy and that area is the one that is failing the most.

David

As for wage inflation – this hasn’t been a threat for a long time, there was a very well argued analysis again from Blanchflower on this point earlier in the year (March?).

House price problems are caused above all by problems in the housing market

Property prices weren’t part of their remit – except in as much as they affected CPI inflation which they don’t seem to have done.

Interest rates should have come down over the summer when it was clear the commodity price bubble had run its course. The fact that the MPC (bar one) failed to see this is quite incredible.

They totally took their eyes off the ball, worrying about short term comodities prices like oil and grain, rather than the huge bubble under their noses.

Then acted several months late.

If you read the minutes and the vote spreadsheet, you see only one person who spots the problems early and calls them : Blanchflower.

They are? I dont see much of Unions saying “we wont put in a high claim this year” yet…