Boring is good…
The Bank of England have an online game designed to explain the relationship between the rate of interest and the level of inflation in the economy. The aim is to keep a hot-air balloon (which represents UK inflation) at a level corresponding to the Bank’s 2% target. The player controls the amount of air in the balloon (which represents the base rate) in order to keep the balloon on track. It’s a pretty boring game.
This is perhaps to be expected. The Bank has, after all, kept the base rate at 0.5% for a record 28 consecutive months and is likely to keep it there until 2012. However, as Graeme Leach, Chief Economist at the Institute of Directors, points out, ‘boring is good. The last thing we need is the excitement of a rate rise.’
He’s right. Inflation might be well above target, but UK growth is still disappointingly sluggish; an interest rate hike could crush the tentative optimism demonstrated by recent employment figures. A solid reduction in unemployment in the first Quarter of 2011, particularly amongst the 16-24 age group, suggests businesses are beginning to invest again, and are quietly gaining in confidence. This is certainly what we at Freshminds have noticed over the last six months or so.
A rise in the base rate might let some air out of the Bank’s inflationary balloon, but it would almost certainly force employers to rethink their short-to-medium term growth plans. The PIIGS countries have already reacted badly to the European Central Bank’s rate rise (now at 1.5%), and although the UK economy is not in anywhere near as much trouble, the dangers are obvious. I agree with Graeme Leach: boring is good.