Published: FT Letters, 17 January 2011
Sir,
It is fashionable for politicians to avoid commenting on decisions of the Bank of England's Monetary Policy Committee in relation to interest rates. However, given the critical importance of avoiding even greater deflationary pressures and the continuing debate about whether current inflation levels are likely to persist, it is worth reflecting on similar debates relating to economic policy as little as 12 years ago.
We know that raising interest rates at this moment would have no impact on the drivers of inflation, not least oil and world commodity prices, and the aftermath of unusual climatic conditions. It is generally agreed that inflationary pressures are materially different from those such as housing costs and wage push inflation, which were predominant on previous post-war inflationary trends.
Yet there are those, including on the MPC, talking of a natural rate of interest of 5% and advocating policies which, in addition to the unprecedented reductions in public expenditure, public sector redundancies and reductions in personal spending power, would curtail fragile growth and essential recovery.
These same voices could be heard at the end of the 1990s, advocating what they then described as the non-inflationary accelerating rate of unemployment. The argument was presented that a "natural" unemployment rate, considerably higher than the levels sustained for the following ten years, was necessary to curtail inflationary pressures and wage costs.
Such arguments were wrong then in the context of unemployment - and are wrong now in terms of using interest rates as a lever to deal with external and short-term inflationary pressures.
Rt Hon DAVID BLUNKETT MP (Lab, Sheffield Brightside and Hillsborough)
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