Rate changes 'a waste of time

The Bank of England's handling of the economy, credited with averting a return to boom and bust, is challenged today by one of the country's top economic think tanks which says all the interest changes since the last election have been unnecessary.

If the Bank's monetary policy committee had left borrowing costs on hold over the past two years, it would have made very little difference to the economy's performance, says the National Institute of Economic and Social Research.

Output would have been slightly more volatile and inflation marginally less controlled. "But, given the costs imposed on the private sector when interest rates change, one can reasonably question whether the marginal benefits gained have been worth the trouble."

Instead of bringing about greater economic stability, the MPC has contributed to greater instability, the institute implies.

Its influential review argues that the MPC wasted its efforts trying to establish anti-inflation credibility by raising the cost of borrowing from 6% to 7.5% during its first year. "This view is reinforced by the experience of other countries. They have managed to keep inflation under control with less interest rate movement, suggesting that fine tuning is not needed to maintain credibility," says the institute.

Just as the MPC raised rates too much during the post-election upswing, it has cut them too far over the past year to avoid recession, the national institute says.

As a result, the cost of borrowing will need to rise from 5.25% to at least 6%, the level the MPC inherited from the chancellor in May 1997, to ensure the government hits its 2.5% inflation target.

With growth now strengthening much faster than expected and likely to increase by 1.8% this year and 2.9% in 2000, interest rates may need to increase to 6.5% by the end of next year.

The national institute advises against tax cuts or increases in public spending. It says the most sensible use of the projected surplus, £10bn better than the chancellor predicted in the last budget, seems to be to reduce the national debt which grew sharply as a proportion of GDP during the period 1989-93.