Bank of England has admitted interest rate cuts don't cure inflation: gang8

Dear Gang

Honest, Guv, we didn't do nuffin'

The original binding force of Gang8 in 1998 onwards was our near-unanimous agreement that raising interest rates to lower inflation is mistaken : the economic equivalent of trying to extinguish a fire by pouring oil on it. We circulated numerous arguments showing that raising interest rates just makes inflation worse.

At the time, this was all utter economic heresy but we didn't mind about that. A little over a year earlier, after all, the Bank of England had been set free to ‘control inflation' and the only weapon it was given to do so was jiggling the base interest rate up and down.

Now times have moved on. Just yesterday the Governor of the Bank of England admitted, for the first time, that the interest rate "weapon" is quite useless to control whatever inflation is going to be thrust upon us by the combined effects of high oil and other fuel prices, higher commodity prices and China's waning ability to export deflation with its cheap manufactured goods.

Instead, the new British policy will be to let inflation run its natural course and the Governor promises instead to write a succession of open letters to the Chancellor of the Exchequer to explain this new economic policy of sitting on his hands.

Which, I suspect, leaves economic orthodoxy about the setting of interest rates and inflation rates in tatters. One way to cut costs would be to disband the Bank of England's Monetary Policy Committee and leave interest rates around 3 per cent, where they should have been all along - just like Keynes left Bank Rate unchanged for over a decade.

Latest score:

Heretics 1, Central bankers nil.

Chris Meakin