Consensus is growing that interest rates have been kept too low for too long and that inflation, which stands at 4.5 per cent, is accelerating dangerously, just as inequality deepens, growth flatlines and incomes decline. Worse still, as we enter the age of austerity, is that near-zero interest rates are artificially supporting an already unstable housing market. Spencer Dale, chief economist at the Bank of England and a member of the Monetary Policy Committee (MPC), has spoken of the immediate need to raise the Bank's base rate and then to keep nudging it upwards. "I don't take lightly the impact this could have on some families," he said in an interview with the Financial Times on 21 May. "But I think the cost to our economy as a whole - were inflation to persist for longer and our credibility [to] start to be eroded - would be even worse."
The coalition government's "emergency" def¬icit reduction programme is based on one fundamental principle: when fiscal policy is so tight, monetary policy needs to remain as loose as possible. It's often said that, because of the rapidity and harshness of the cuts in public spending as well as the absence of growth in the UK economy, the government needs greater flexibility. It needs to be less rigid and more pragmatic. It needs a plan B, dare I use the cliché.
In one sense, it already has a plan B (abnormally low interest rates and the option of more quantitative easing). What it might soon need, especially if the MPC votes to raise interest rates, is a plan C (which would mean slower cuts and the kind of humiliating policy reversal that the Chancellor, George Osborne, would never sanction).
I put this to the Business Secretary, Vince Cable, when we meet on a bright, breezy afternoon at his office, with its high windows and fine views of Westminster Abbey. Reclining in a large, soft chair and sipping from a mug of tea, Cable, who has shrewd eyes and a rumpled charm, is quick to point out that the greater danger is not inflation, but deflation.
He cites the long deflationary slump that followed the financial crisis in Japan at the beginning of the 1990s as a warning of what might lie ahead for Britain. » | Jason Cowley | Wednesday, May 25, 2011
"I think the thing that worries me more than anything else [is that] we really haven't engaged with the real depths and seriousness of the financial crash. I was very impressed with that Warren Buffett metaphor that asset-backed mortgage lending was the atomic bomb, and that there are hydrogen bombs out there. I just don't think that collectively governments have got to grips with this at all." So another huge bomb could go off, sooner rather than later? "It's not imminent. But you can see this happening." – Dr. Vince Cable
NEW STATESMAN: The Vince Cable Interview »
