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Buried beneath the panic and scaremongering lies a picture of steady growth


Bank of England is yet to raise interest rates

Bank of England is yet to raise interest rates

Stefan Rousseau

Bank of England is yet to raise interest rates

So it looks like August. Given the run of iffy data in recent weeks, including a shading back of confidence about growth in the all-important service sector, there is a perfectly decent justification for holding back on increasing interest rates.

Some of us think that this may well be shown as a policy error but the case for "when in doubt, do nowt" is hard to argue against. Given the data as published, the Bank of England's decision makes sense. Given what is probably happening to the economy it may well turn out to be wrong.

First, what can we sensibly say about the economy? Then, what is the likely profile of rates? And finally, what are the risks?

When you are trying to assess how an economy is performing you look at a range of data and try to make some sort of judgment on the basis of these, rather than looking at any single number, especially the official GDP figures, because these are invariably revised. Indeed, there seems to be some consistent downward bias in these. As Goldman Sachs points out in a recent paper, of the 31 occasions between 1975 and 2008 when the initial estimate of quarterly GDP was negative, the average upward revision was nearly 1%, or 3.9% annualised. It would be consistent with that experience were that minus 0.5% figure for the final quarter of last year to turn out to be a plus.

I find the employment data particularly encouraging. It is rising strongly. Over the past year total employment climbed by nearly 400,000, despite a reduction of 120,000 in public sector jobs. In the three months to February the pace of job creation speeded up, with a net extra 143,000 jobs being created, a rise in labour participation rates and a fall in unemployment from 8.0% to 7.8%.

That really is not consistent with the economy being stagnant. Goldman Sachs thinks the GDP numbers will be revised upwards and that is surely right. The bank is also forecasting 2% growth this year and 2.7% next, both figures higher than the consensus.

Interest rates are going to go up - there is no doubt about that. The issue is the profile of that rise. As a general guide to what is the "right" short-term rate, a formula was developed by the Stanford economist John Taylor. The idea is that you look at inflation and employment and set a interest rate that is consistent with full employment and stable inflation at the targeted rate. One twist is that rates did not dip below zero during the recession - they couldn't, or at least negative interest rates are hard to engineer. Instead the Bank introduced quantitative easing: it could not cut the price of money so it increased the supply.

The other twist is the impact of a widening of bank spreads - the gap between the amount banks pay on deposits and what they charge for loans. The Taylor rule, calculated conventionally, would have called for an increase in rates before now and would lead to a rise to between 2% and 3% by the end of next year.

That said, let's just see how the economy develops. It cannot be said too often that the early stages of any economic recovery always feel fragile.

Look at hard data such as employment numbers, the balance of payments, house prices and tax receipts. Discount all those dire warnings from self-interested lobby groups.

Ignore political point-scoring of course. And be as distrustful of unexpectedly strong data as well as unexpectedly weak stuff.

It is the big picture that matters and that is one of steady modest growth.