MPS member fires parting shot on growth and interest rates

Sushil Wadhwani, the Bank of England's leading dove, fired a parting shot to former colleagues on the monetary policy committee last night when he blamed their over-pessimistic view of inflation for reducing growth and causing higher interest rates.

After a prolonged battle to keep the cost of borrowing down, Mr Wadhwani used his swansong speech at the end of this month to say that the MPC had consistently overestimated inflation by around 0.5 percentage points.

He added that inflation had persistently been below the 2.5% target set by the chancellor, and that more accurate forecasts of the likely price pressures generated by falling unemployment could have resulted in borrowers paying less for their loans.

"Over the last few years, the MPC has had too gloomy a view about the level of potential output in the economy. Although some adjustments to this view have been made, I would regard the current view about the level of potential output as still being too pessimistic."

Addressing the National Institute for Economic and Social Research in London, Mr Wadhwani said that had rates been kept a quarter-point lower over the life time of the MPC, inflation would have "been closer to its target, the level of output would have been a little higher, and the path of output and inflation would have been more stable over the last three years".

The Bank warned on Wednesday that interest rates might have to rise in the coming months as a result of economic recovery, the surge in house prices, and the possible inflationary impact of the Budget. Mr Wadhwani said that the MPC could deflate the housing market with a warning that it would react to any emerging bubble.

But he added that the likely impact on prices from Budget increases in employers' national insurance contributions was less than the Bank imagined, and emphasised that the impact of globalisation and new technology has reduced inflationary pressures. "This is a world in which wage-price spirals are less likely as firms and workers alike know that the central bank will do whatever is necessary to keep inflation at target."

Mr Wadhwani said he had used the Bank's own model of the economy to simulate the effects of lower rates in recent years. "I would not wish to take the precise estimates too literally, but they are suggestive of gains had policy been less tight."