Rachel Lomax, deputy governor of the Bank of England, said the MPC could not afford to be complacent and must be realistic over what monetary policy was able to achieve. She stated there was an element of luck in the lengthy economic stability experienced over the past decade and questioned whether more turbulent times would test the MPC’s credibility.
However, Lomax added: “I am confident that our present policy framework does have the capacity to withstand more turbulent times, should they materialise. After all, it was designed for them.”
Ray Boulger, senior technical manager for John Charcol, said the Bank had already faced difficult times following 9/11 and come through it successfully. “The whole market dried up for several months, but by cutting rates, a downturn in the economy was averted. It was a particular challenge the Bank met very well.
“To say the MPC risks losing its credibility is quite strong. The perception of the MPC doing a good job could weaken if it focuses too much on inflation rising, but it would actually have to not achieve its objective of keeping inflation within 1 and 3 per cent.”
He added: “Clearly there is a risk to increasing rates one time too many. It’s a danger because the Bank seems to be concerned about inflation being too high rather than too low. Yet, if inflation fell below 1 per cent, it would be just as bad as going over 3 per cent.”
