Issue of the week: Carney’s tough call

Inflation may be rocketing, but the Bank’s decision on interest rates is still finely balanced

Inflation hit “a five-year high” of 3% in September – a full percentage point above the Bank’s target. It is set to rise still higher this month, which will likely force the governor, Mark Carney, to get out his fountain pen and write a letter of explanation to the Chancellor. But the real significance of the figure, said Larry Elliott in The Guardian, is that “the prospect of Britain’s first interest rate increase in more than a decade” has now moved closer. “Financial markets are now betting strongly that Threadneedle Street’s Monetary Policy Committee will reverse the quarter-point cut in borrowing costs made in the aftermath of the Brexit vote” when it meets in November – though the higher rate will exact a further squeeze on the already battered living standards of many Britons. The governor’s difficult balancing act of “targeting rising prices” while “supporting jobs and activity with low rates” seems to be getting trickier by the day.

Much of the recent rise in inflation – which has rocketed from just 1% a year ago – is down to “the fall in the pound since the Brexit vote”, said Tom Knowles in The Times. Prices of basics including bread, rice and meat all rose last month. The consensus among economists is that this “imported” inflation will peak at 3.2% next month. What worries the governor, however, is that the steady fall in unemployment could set off an inflationary wage-price spiral unless it is checked now. Not everyone on the MPC agrees, said Chris Giles and Gavin Jackson in the Financial Times. While more “hawkish members” of the committee believe that the time is ripe “to withdraw a little monetary stimulus”, several have their doubts. As the new external member, Silvana Tenreyro, points out, “a premature increase” could be “very costly”.

Effectively, Carney is in “a no-win situation”, said Swaha Pattanaik on Reuters Breakingviews. If he hikes, “he’ll be criticised for hurting a slowgrowing economy”; if he delays, he’ll be “accused of playing fast and loose”. Some critics – including a majority of economists polled on Reuters – believe that raising rates from their current record low “would be an error on a par with that made by the European Central Bank when it raised rates during the financial crisis”. They point out that the economy grew by just 0.3% in the second quarter, “the lowest rate of any G7 nation”, and worse may lie ahead “if the UK struggles to agree a trade deal with the EU”. Yet Carney’s life “is unlikely to be much easier if he delays now”, having “shied away from expected rate rises before”. His “least bad option” may be “to tighten policy and rethink if the worst comes to pass”.