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Britain ‘still at risk of recession’ 30 June 2010
Tom Harvey (about the author)

Member of the Bank of England Monetary Policy Committee says that Britain is still at high risk of falling back into recession and interest rates will have to stay low until a firmer recovery.

Alan Posen said that Britain’s economy was trapped between two outcomes — one dominated by budget austerity in Europe that will hurt growth, and one by recovery in the rest of world.

“If we get to the positive outcome, I will be only too happy to raise rates and, should others on the MPC agree to do so, I am confident that would end inflation creep very quickly,” Mr Posen said.

“I regret to say that I am not as confident, however, that we will get to that favourable situation, and that much of what determines our outlook will take place beyond our borders and certainly beyond the MPC’s remit.”

Rates may not increase for some time

Markets showed little reaction to Mr Posen’s comments, which reinforced the view that it would be some time yet before the Bank tightened policy despite one member’s call this month to raise interest rates from the record low of 0.5 per cent.

Andrew Sentance, an MPC member, is worried by the resilience of inflation that is running at 3.4 per cent, above the Bank’s 2 per cent target.

However Steven Jackson of Beatmydebt.com warned that increasing rates would cause many people financial difficulty. "Once interest rates start to rise, you can be sure that mortgage rates will follow suit and the cost of many people's monthly mortgage payments will increase" he said.

"This is going to put a significant strain on many family budgets at a time when people are at risk of reducing incomes or losing their jobs all together" Jackson added.

Rising inflation

Mr Posen acknowledged that Britain, unlike almost all other major Western economies, had a problem of rising inflation. He said that this was because the MPC had consistently underestimated inflation and had given the impression that its commitment to keeping inflation below the 2 per cent target was waning.

That in turn had led people to expect rising inflation, which became a self-fulfilling prophecy by increasing wage demands.

He said: “It appears that actual inflation outcomes, which have predominately been overshoots of the Bank’s target for the last four years, are contributing to a slow upwards creep in inflation. It is naive or disingenuous for us on the MPC to pretend that such as sustained series of above target outcomes and forecast errors would have no impact on the margins for some people, even if we believe — as I do strongly — that largely the right decisions and forecasts were made ex ante.”

Source: The Times