Bank’s swing voter opposes rates rise
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One of the swing voters on the Bank of England’s monetary policy committee has said that raising interest rates could be “exactly the wrong thing to do” after a survey showed inflation expectations fell sharply in the first quarter.
Paul Fisher, charged with implementing the Bank’s money-printing quantitative easing programme, said there was “time for the economy to recover” before raising rates.
Mr Fisher has long voted against a rise, but that he is still leaning against an increase, in spite of inflation forecast to hit 5 per cent this year, will add to the sense that the majority of the committee remains resistant to tightening monetary policy. He argues there is little sign of inflation creeping into wages.
Mr Fisher said that although he thought the recent weakness in the economy was “just a soft patch, I do worry about a more prolonged weakness in demand, and in
particular, consumer spending”.
“Putting up Bank rates could be exactly the wrong thing to do at this precise moment,” he said. “If it further damaged consumer confidence then it could be the marginal factor that makes a soft patch turn into something worse.”
Last month was the final appearance on the committee for Andrew Sentance, who has long been the most vocal advocate for rate rises. While two other members are also voting for increases, Mr Sentance’s replacement, Ben Broadbent, a former Goldman Sachs economist, appears less hawkish. Others on the committee, including the governor, have not been eager to raise rates.
Mr Fisher’s comments came as a survey by Barclays Capital showed a sharp drop in inflation expectations at the beginning of the second quarter. One-year-ahead expectations fell to 3.3 per cent in April from 4.2 per cent in January, while for five years ahead they fell to 3 per cent from 4.4 per cent.
The drop in expectations could reflect the timing of the survey, which came soon after official data for March showed inflation had fallen. Sentiment may have reversed since, after inflation in April rose to 4.5 per cent.
Separately, public borrowing was higher than expected in April, mainly because of one-off factors such as the end of the tax on bankers’ bonuses, and the outlook remains uncertain.
Public sector net borrowing was £10bn in the first month of this financial year, against £7.2bn a year earlier. The average forecast made by economists was for borrowing of £6.5bn, according to Bloomberg.
However the figures for April 2010 were swollen by £3.5bn in receipts from Alastair Darling’s bankers’ bonus tax, which is being replaced this year with a levy on bank’s balance sheets that has yet to come into effect.
The Office for Budget Responsiblity, the independent body that monitors the public finances, said the rise in borrowing was “more than accounted for” by the bonus tax.
Philip Rush, economist at Nomura, said: “Borrowing in April 2010 had been lowered by the one-off payroll tax on bonuses”.
Outside of the bonus tax, the OBR said tax receipts rose by 7.9 per cent, close to the official forecast for the full year.
Also, the public borrowing figures look rather better, given that half of the £1bn increase in 2011 debt interest payments compared with 2010 was because last April’s payments were depressed by low inflation.
Overall tax receipts fell by more than £300m to £42.9bn in April, but, bankers’ bonus levy apart, tax receipts appeared relatively strong compared with 2010. VAT was up by 15 per cent. Taxes on income and wealth were up by 4 per cent.
Current spending was up by 5 per cent at £54.1bn, but some of this was because of the timing of debt interest payments.
Departmental spending was basically in line with the forecasts of the Office for Budget Responsibility, the Treasury said, while social benefits spending was up by 5.1 per cent compared with an OBR forecast of a 4.2 per cent for the whole year.
Borrowing figures for 2010 were also revised down by £1.8bn to £139.4bn because of higher tax receipts than initially estimated.
Adding to the positive picture, while a tax on bankers’ bonuses is no longer in effect, the replacement bank levy is expected to raise a net £2.6bn – more than the £2.3bn net of income tax and national insurance contributions the bonus tax raised.
Stronger tax receipts in most areas suggest that the economy had performed decently early in the second quarter, while recent employment data have suggested that companies are hiring.
But fears remain that the UK’s productivity has been badly affected by the recession, suggesting that growth could be weaker in the medium term; this would put the public finances in a worse state.
The Bank of England warned earlier this month that the UK’s potential output had suffered more during the recession and recovery than it had previously thought.
Philip Rush said: “Current fiscal consolidation plans are conditioned upon optimistic assumptions about what the UK can produce before it starts to run into capacity constraints.
“Under our more conservative supply-side assumptions, long-term growth will be slower, but the output gap will also likely close quicker. Later in the parliamentary term, the Chancellor may need to announce and implement deeper cuts or else the current structural deficit may not be closed as planned.”