LONDON (Reuters Breakingviews) - Doing the right thing is its own – and sometimes only – reward. Bank of England Governor Mark Carney’s hints that policy interest rates may soon rise can be justified by higher inflation. But he is in a no-win situation. The central banker will be criticised for hurting a slow-growing economy if he hikes and accused of playing fast and loose if he delays.
UK inflation is running a full percentage point above the central bank’s 2 percent target and has reached levels not seen since 2012, national statistics office data showed on Tuesday. True, the impact of past declines in sterling, triggered by last year’s vote to leave the European Union, should fade. But there are other good reasons why a majority of the Bank of England’s Monetary Policy Committee judged in September that policy rates might have to rise. Unemployment is at 4.3 percent, its lowest in more than four decades, suggesting there is little slack in the economy. Consumer debt is growing at nearly a double-digit clip.
Critics – including a majority of economists polled by Reuters – believe that raising rates from a record low of 0.25 percent 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 just 0.3 percent in the second quarter, the slowest rate of any Group of Seven industrial nation. Worse may be ahead if the UK struggles to agree a new trade deal with the European Union and falls out with its largest trading partner.
But political uncertainty will linger for a while. And the parallel with the ECB in 2008 is imperfect: the Bank kept policy very loose after the Brexit vote, and rates have been at record lows for many years. Carney’s least bad option may therefore be to tighten policy and rethink if the worst comes to pass. His life is unlikely to be much easier if he delays. UK lawmakers branded him an “unreliable boyfriend” in 2014 after he shied away from an expected rate rise. In central banking, as elsewhere, mud sticks.
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