By Jonathan Isaby
"The Chancellor's excellent fiscal policy is in safe hands but, sadly, monetary policy is not. The good work done by the Budget will be threatened by monetary policy. We all know that the Bank of England has let inflation out of the box. It has lost control of inflation. Consumer prices index inflation is now 4.4%, and retail prices index inflation, which many people feel is a truer measure of the cost of living, is now 5.5%. Too many letters have been sent to the Chancellor by the Governor of the Bank of England explaining why, yet again, he and the Monetary Policy Committee have missed the inflation target.
"Our higher-than-expected inflation has had the following consequences. Our debt interest payments are £4.6 billion higher than forecast in November for the simple reason that inflation has fed through to gilts, one third of which are index linked. We have also seen increases in the spending totals for social security and public sector pensions. This has led to an overshoot in the public sector borrowing figure, not for this year but for next year, of £4 billion. For 2012, there will be an overshoot of between £10 billion and £12 billion on the borrowing numbers that we forecast last autumn.
"Higher inflation has another pernicious consequence. It will make cuts in public spending deeper, assuming that the Chancellor sticks to his cash totals, which I have every confidence he will. The Office for Budget Responsibility has forecast that average earnings will not grow faster than inflation until 2013, but the real worry in the OBR report is that inflation will not be tamed, and that the Bank of England does not tighten monetary policy in such a way as to get inflation under control. The report sets out a very gloomy scenario. It is that, in 2012-13, inflation could be stubbornly trading at around 4%. In those circumstances, real earnings would need to tick up. They will tick up, and there will be upward pressure at that stage for the Bank to jack up interest rates.
"According to the OBR's gloomy scenario, it could be as bad as having a 6% base rate by 2013. That would result in the mother of all squeezes-much worse than the one we are already contemplating. That is why I suggest that, when we look at the macro-economy, we pay more attention to what the Monetary Policy Committee is doing. It is the duty of this House to scrutinise exactly how the committee is ensuring that monetary policy works together with, and supports, fiscal policy. At the moment, it is not doing so."