Bank of England: Hurry up and do nothing.

On a return flight from London, the passenger next to me kindly let me read her paper.  I don’t normally read foreign papers but, being the dedicated EMBA student, I went straight for the The Daily Telegraph’s business section.

The front page of the business section was full of gloom and doom.  Almost every story was negative; "Woolworths - picking a scapegoat?", "Manufacturers to raise prices again", "Senior executives fear for London’s future".  Amidst all this negativity, one headline caught my eye.

"Three-way split looms on BoE interest rates".

In my current study of Macro Economics, I am learning about the role of central banks in setting monetary policy and managing inflation, among other things.  So this article’s headline caught my attention because I was curious to read about what the UK’s central bank, the Bank of England, was doing about all of this doom and gloom.

From the sounds of it, they have agreed to do nothing.  Well, at least, they voted 8-1 to leave interest rates as they are.  The interesting part is that the Monetary Policy Committee (MPC) actually seriously considered all three different courses of action.  It has been two years since it has done that.

It appears that the MPC is relegated to inaction, crippled by the fear that the wrong expectations will be set if it increases interest rates.  However, the Consumer Price Index (CPI) rose 3.3% last month which is significantly higher than their target of 2%.  If nothing else, this is a call to action, but they have agreed to do nothing.

From my consumer perspective, the seeds of inflation seem to be spreading like wildfire.  The price of gasoline appears to be a major contributing factor to today’s inflation.  For central banks, the obvious move is to raise interest rates in order to reign in inflation.  So why don’t they just do it (like NIKE)?

Can you say, Sub-Prime Credit Crisis.  As money is the grease that enables the wheels of commerce to turn more smoothly, the liquidity issues caused by the mortgage crisis pose a very interesting problem in this current climate of inflation.

What are the central banks to do?  The mortgage crisis is already squeezing the economy.  Raising interest rates would further constrict the money supply and grind commerce to a halt.  Lowering interest rates will only add to our inflationary woes.  Leaving interest rates alone is like ducking your head in the sand.  It’s a punt.  It’s nothing.

Photo Credit an untrained eye.

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