"British business regards the MPC's first decade as a major success, and we congratulate the MPC for helping to deliver a period of uninterrupted growth and low inflation. Our members need economic stability and low inflation, and we have consistently supported the MPC’s efforts, even if we do not always agree with every single decision they make. But more difficult times lie ahead, and we expect the MPC to combine firmness with gradualism and to avoid overkill.
“Contrary to superficial impressions, the BCC does not always call for interest rate cuts, and we do not always oppose increases. We have acknowledged that the January 2007 increase in Bank Rate, though not communicated well, was necessary. We have also accepted that, after last month's shock inflation figures, a Bank Rate increase to 5.50% may be necessary in May to restore credibility in the anti-inflation strategy.
“The current position is clearly worrying. The recent upsurge in UK inflation has been bigger than anticipated; it has also been bigger than comparable inflation upturns in other G7 economies. Against this background, one cannot be complacent. But there is a clear danger that natural concern over recent developments would produce an over-reaction, and would result in damaging monetary overkill. At this stage, calls in some quarters for a 50 basis points early increase in Bank Rate, to 5.75%, are misguided and potentially dangerous.
"The recent upturn in inflation has reignited the public debate over the importance of the money supply and asset prices. Inflation is, by its very nature, a monetary phenomenon. But this does not mean that there is a causal link between inflation and a particular measure of broad money supply, such as M4. More informed public discussion of money supply trends would be very helpful. Indeed, monetary aggregates and asset prices can and should provide useful information for the MPC. But money supply or asset prices should not become policy targets.
David Kern concluded: "With all its imperfections, the current UK monetary regime, based on direct inflation targeting, is far superior to alternative systems based for example on targeting M4 or asset prices. The MPC has tightened policy significantly since last August, and the markets expect further tightening next week. While this gradualist approach will inevitably cause pain for British business, it is likely to achieve the desired aim of curbing inflation without decimating the economy. While we expect the MPC to act firmly, we strongly urge them to avoid overkill, which could have destructive consequences and may cause long-term damage to the economy."