Raise interest rates now to stem inflation, warns John Major’s chancellor Lord Lamont
A former Tory chancellor has called for an increase in interest rates as he wanred about the risks surrounding inflation.
The Government’s policy of calling for wages to go up could further drive inflation if the boost is not accompanied by increased productivity, Lord Lamont said today.
Amid soaring energy prices and shortages of workers and materials, pressures from rising prices are increasing as the pace of the recovery from the coronavirus pandemic slows.
The Bank of England has warned inflation is expected to rise above 4 per cent by the end of the year, as its monetary policy committee holds interest rates at 0.1 per cent.
Lord Lamont, who was chancellor under Sir John Major, acknowledged that central bankers believe the current inflation rate is “transient” but warned “there is a risk of it getting embedded”.
“The danger is that inflation becomes embedded, it results in wage claims, public sector wage claims, and it becomes extremely difficult to reverse, and the longer you leave it in terms of putting up interest rates the more interest rates may have to go up and the faster they may have to go up,” he told BBC Radio 4’s Today programme this morning.
I would personally be in favour of an interest rate (rise) now, but also the Bank of England ought to be considering ending, scaling back, its quantitative easing.
“This carries a risk of inflation in many people’s eyes, it also carries a risk of a loss of credibility because it might look as though the bank is financing Government expenditure rather than just keeping interest rates down and smoothing the markets.”
Prime Minister Boris Johnson this week sought to play down the prospect that rising inflation could cancel out wage increases as he pins his long-term hopes on moving to a high-wage, high-skilled economy after Brexit.
But business leaders have been among those to warn that increasing wages without a boost to productivity levels could drive inflation and result in increased costs for consumers.
Lord Lamont told Today: “Wages going up because of increased productivity… is a good thing.
“Just pushing up wages by themselves, calling for them to go up, will not increase productivity itself and could become inflationary.”