Sushil Wadhwani, who was a member of the Bank of England’s interest-rate setting team until last year, yesterday warned that a premature rise in borrowing costs could derail the nascent economicrecovery.
The economist and hedge fund expert who played a doveish role on the bank’s monetary policy committee, said that with the inflationary outlook benign, the risks of a rate rise far outweighed the threat of rising prices.
Saying fears that a correction in spending by debt-laden consumers were “almost certainly” over-egged by some commentators, Wadhwani said nothing should be done that could dampen hopes of a US- led pick-up in growth.
“I certainly see risks of tightening (of monetary policy). In the UK and all across the G7, policy-makers need to be patient.
“We’ve had slowdowns before and it’s important to ensure recovery in the world economy is entrenched and sustainable,” Wadhwani said.
He was speaking in Edinburgh before delivering the Royal Bank of Scotland annual economics lecture last night.
“The Japanese experience shows if you tighten prematurely, you can kill off the recovery and compound the problems going forward. That makes it much more difficult to recover a second time around.”
The matter of a rise in interest rates came into focus on Tuesday when Mervyn King, the Bank of England governor, said the cost of borrowing would probably rise as the global economy improved. However, Wadhwani was concerned that the fragile recovery under way in Britain and elsewhere could stall if rates went up.
“There are significant challenges facing the world economy and the key is what happens to the US. If it turns out the US is beginning a sustained recovery, then I think the UK will be quite a bit better.
“If recovery proves ephemeral in the US, I think we shall undoubtedly be buffeted and we will be affected quite significantly,” he explained.
While premature tightening could lead to a slowdown in trade, there was no evidence rates needed to be increased to control inflation, which slipped on the headline measure from 2.9% to 2.8% last month.
Wage growth has been benign, and given the problems experienced in other leading global economies, there was little prospect of imported inflation.
Asked whether UK base rates should have been cut more aggressively, Wadhwani said it would be inappropriate to make judgments with the benefit of hindsight.
He noted that Bank of England research suggested the increasing popularity of home-ownership had powered much of the recent growth in house prices. As housing asset prices had risen with the borrowings on which they were secured, consumer balance sheets were not strained in any significant way.
