Monetary policy debates rage on as UK’s economy heats up

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The UK's economy is heating up – but economists haven't stopped disagreeing with each other. The monetary policy debates are as fierce as ever.

Andrew Sentance, senior economic adviser at PwC and ex-Monetary Policy Committee (MPC) member has argued for a rate hike in the Telegraph.

If the recovery does gather momentum in the UK, events may force the hand of Mark Carney and the MPC, causing interest rates to rise sooner rather than later.

(Telegraph)

Another ex-MPC member, Danny Blanchflower, wasn't happy with this, and took to Twitter:

Kit Juckes, Societe Generale may have found the source of the disagreement between Sentance and Blanchflower:

Personally, I think that framing the policy debate around inflation (pushed up by regulated prices) and unemployment (distorted by part-time work), is to blame for some of the disagreement among economists but the impact on the UK interest rate market is increased volatility more than a clear direction.

Ben Southwood, Adam Smith Institute on the interest rate focus:

Interest rates are in general a bad tool with which to do monetary policy. But since they are a tool of monetary policy, we should not use them to tighten policy when demand is still growing below trend.

This would absolutely send the wrong signal to markets about the bank's intentions, and could easily stop investment and spending in its tracks.

Interest rates are low now mainly because of the ongoing stagnation, not policy. Rates will rise when conditions will improve but this doesn't mean the government can will growth into existence by raising rates.

The risk of high inflation seems low from the evidence we have, and in any case inflation's significance pales in comparison to the importance of NGDP (aggregate demand).