MPC's focus on inflation must remain

A FORMER member of the Bank of England's Monetary Policy Committee, which is responsible for setting UK interest rates, last week called for the body to be disbanded in its current form.

A FORMER member of the Bank of England's Monetary Policy Committee, which is responsible for setting UK interest rates, last week called for the body to be disbanded in its current form.

Professor David Blanchflower, who was a member of the MPC from 2006 to 2009, said the committee as currently constituted was “not fit for purpose” and should be overhauled in terms of its membership and its remit.

Writing in the New Statesman, Prof Blanchflower claimed that the MPC had been “asleep at the wheel” and that the recession had been “much deeper because of their failure to act”.

And in a follow-up interview with the BBC, Prof Blanchflower added that inflation was “the wrong target” for the MPC and that it should also take account of the impact of its decisions on unemployment.


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It is a matter of record that Prof Blanchflower was one of the few economists to predict the recession and that he consistently voted to cut interest rates from early 2007. What is more open to debate is whether this was early enough to have prevented such a deep and damaging recession even had Prof Blanchflower won the argument. Since the drastic cuts in interest rates eventually introduced by the MPC in the autumn of 2008 had such little impact, there must be substantial doubt as to whether more gradual cuts would have been any more successful.

The collapse of Lehmann Bros and the shock to the global financial system which followed would have happened regardless of UK monetary policy.

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And, equally obviously, there is no way the programme of quantitative easing to boost the money supply could have been started any earlier since it would have required the UK Government to recognise the severity of the problems to come.

Prof Blanchflower's alternative strategy is also problematical, as it makes the potentially dangerous assumption that the higher level of inflation which would result from a focus on employment will still be a manageable level of inflation. As the experience of the UK economy in the 1970s and 80s demonstrates this is not necessarily so.

Tasking the MPC (or whatever body might replace it) with preserving jobs at the cost of higher inflation would be a high risk strategy in terms of economic stability which, in the long run, could destroy more jobs than it saves.

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