Bank of England playing ‘confidence trick’ on inflation, MPC veteran says

Bank of England Attempting Inflation ‘Confidence Trick,’ Says Former MPC Member Kate Barker

By Emma Rowley
The Telegraph, London
Saturday, February 5, 2011

http://www.telegraph.co.uk/finance/economics/8304054/Bank-of-England-att…

Keeping inflation under control is a “confidence trick” that the Bank of England may fail to pull off, Kate Barker, one of its former rate-setters, has warned.

Ms. Barker, who served nine years on the Bank’s Monetary Policy Committee (MPC), said rising prices may have already damaged the Bank’s credibility and threaten a “more profound” loss of faith among the public.

A loss of credibility is dangerous as people begin to assume inflation will remain over target and so put up wages and prices accordingly, resulting in a self-perpetuating spiral of rising prices.

“If you believe inflation is going to come back to 2 percent, you are going to behave as if that’s going to happen when you’re setting wages and setting prices,” said Ms. Barker.

“Once you start to think this monetary policy isn’t all that it’s cracked up to be, and things need to be changed in some way, then things inevitably become more difficult.”

She added: “It’s like a confidence trick.”

Businesses and markets think the MPC has “perhaps been behaving in a different way coming out of the [financial] crisis and has tolerated inflation more than you might have expected,” she said, adding that companies probably have less faith that inflation will return to the official 2 percent target “than in the good old days.”

Ms Barker’s remarks will increase the pressure on the Bank policy makers over their failure to keep the official rate of inflation, as measured by the consumer price index (CPI), near the target.

The annual pace of price rises was 3.7 percent in December and Mervyn King, the Bank’s governor, has said that inflation is likely to be between 4 and 5 percent over the next few months.

He argues that prices are being pushed up by “temporary” factors like the recent rise in VAT, climbing oil prices, and the weak pound making imports more expensive, but expects them to fall back given the slack in the UK economy.

Others fear that the driving factors are more persistent. The issue has split the MPC, which last month saw its most “hawkish” member, Andrew Sentance, joined by Martin Weale in voting to raise the benchmark interest rate from its 0.5 percent low to curb inflation.

Ms. Barker, whose comments at an Anglia Ruskin University event were reported by Bloomberg, said the dilemma the Bank faces has worsened since she stepped down from the MPC in May.

The chance of a surprise rate rise when the committee meets next week has increased after key surveys showed the economy rebounded in January after the snow melted. That suggested the alarming 0.5 percent contraction in GDP in the last quarter was a temporary weather-related setback and that the economy may be better able to cope with a rise.

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