Bank of England Governor warns against gradualism

by Gill Montia

Story link: Bank of England Governor warns against gradualism

The deputy governor of the Bank of England, Sir John Gieve, gave a speech earlier this week in which he warned that the Monetary Policy Committee (MPC) could lose its fight against inflation if it is hesitant in raising interest rates.

The governor spoke of the many uncertainties ahead that had to be considered when policymakers set rates.

Examples of these are spare capacity in the labour market, the ability of business to raise prices, oil prices and money supply growth.

In addition, he referred to the impact of the weakness in the US housing sector, which is causing volatility in financial markets and is partly responsible for the fall in the value of the US dollar.

Whilst Sir John agreed that it was often sensible to move interest rates gradually so that the effects of past rises can be guaged, he stated clearly that gradualism in monetary policy could compound problems.

Some members of the MPC have been concerned that wages could increase above their current level because of higher inflation, whilst other members of the committee are arguing that pay rises can be contained because there is sufficient slack in the labour market.

However, these arguments must also take into account the recent rapid growth in the money supply and the inflationary effects of oil price increases; the price of oil is approaching its all-time high.

Also, much rests on resolving the difficulties caused by the collapse of the US sub-prime mortgage market.

This is still adversely affecting the financial markets, making it more difficult to judge the next direction of rates.