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If the Monetary Policy Committee had cut interest rates again yesterday, with only a few days left to wait before the publication of the next Quarterly Inflation Report, it would have sent some very mixed messages.  The MPC is not routinely in the habit of “back-to-back” cuts, so what would have been the reason to panic this time?  And whatever the answer to that, the MPC would have been implying that it were no longer concerned with inflation above the target level and rising, if companies’ and households’ day-to-day purchases are any guide. 

Guiding the economic juggernaut that is UK plc along this wet and wriggly stretch of road requires a cool nerve and delicate operation of the controls, not a wrenching of the wheel and the simultaneous and unsubtle use of both accelerator and brakes. 

Next week’s report will give the detailed answer, but for the time being it looks as if UK plc is just not slowing down fast enough (in accordance with the current “master plan”) to offset all the inflationary pressures to which it is exposed.  It would look patently stupid to combine the announcement of a CPI number above 3% with an interest rate cut.  In insisting to delude itself that interest rates must be cut, the consensus is ignoring the harsh economic fact that slower growth is essential if inflation is to be contained.  Why is that simple proposition so hard to understand?  Just because the medicine doesn’t taste nice doesn’t mean that the patient should not take it.  The price of oil has now doubled in the last year.  Goldman Sachs fear it could rise another 65% from here within two years.  Food prices keep on going up, the Chinese government now announcing an official policy to buy agricultural assets in Africa and South America in order to guarantee its own food supplies (and by implication deny them to the rest of us).  And to cap it all, the International Monetary Fund has issued an official warning that “inflation concerns have resurfaced after years of quiescence”. 

It is now urging central banks to be ahead of the curve in dealing with the clear and present threat of inflation rather than being ahead to cope with the possible (but so far unrealised) threat of recession.  If inflation does get a foothold, the monetary treatment will be agonising.  Just think back to the early 1990s.  But if that threatened recession eventually materialises, at least the MPC has been clever enough to keep plenty of ammunition back to try to deal with it.  Keeping rates on hold is exactly the right thing to do until such time as inflation sticks to its script.