Interest rates debated as inflation fears echo the 1970s - In response to the news on Tuesday that inflation is 3.3% and rising*, the Monetary Policy Committee met yesterday and gave serious consideration to imposing a pre-emptive interest rate rise.
 
Julia Finch of The Guardian likened this indecision to ‘pussyfooting’ whilst The Independent’s Jeremy Warner recognises that the “lessons of the 1970s hang over policymakers like a spectre”.   However, clearly not haunting enough as the members agreed that the medium-term inflationary expectations were relatively secure and voted for a rate cut.  They felt that an unexpected base rate rise “might be counterproductive by appearing to exaggerate the MPC’s concerns about the inflationary outlook”. 
 
Jeremy Warner thinks this decision may be the wrong one. He cites the example of the inflationary wage spiral in the 1970’s when businesses were unable to pass the higher costs to their customers and believes this will haunt Britain again, particularly when the economy is slowing as rapidly as it is now; “What we’ve got to worry about now is not so much the inflationary consequence of rising wages as their propensity to make British industry uncompetitive and therefore subject to repeated state bailouts or outright insolvency”.
 
The other concern is the rise in oil prices.  Whilst Warner observes that Gordon Brown will flee to Jeddah this weekend to try and persuade the Saudis to increase oil supply, he is sceptical that this alone will do the trick – “the horse has already bolted”.  He argues that the MPC will not listen to the biggest lesson of the 1970’s, that oil prices cannot be fought with lower interest rates.
 
* It has been widely speculated that rising food and energy prices could push UK consumer inflation above 4% this year.