MPC should target asset prices too
The Bank of England has discovered the limitations of pursuing the single target of inflation by using the single weapon of interest rates.
Rising consumer prices may be a risk for late 2008 but there are far more pressing problems. The Bank has found itself under pressure to compromise by cutting rates to stimulate spending, whatever the medium-term consequences.
Even if the Bank is not to be asked to consider growth, employment, the level of the pound or other economic factors, the time is right for a wider definition of inflation. The monetary policy committee should be considering asset-price inflation as well as consumer prices.
Over-valued share markets, property prices – even art values – are made possible by buyers having the finance to purchase at inflated prices. Housing is an easily visible example: lend a buyer four times his income rather than three times and he can bid more for the same property. The same applies to commercial property and all other assets including machinery and second-hand cars.
It was by not controlling lending that asset prices have soared. The Bank could have raised interest rates to makes loans more expensive, thus deterring borrowing and restraining prices, but that is not in its remit.
Now, with asset prices falling, it finds itself pressed to do the same policy in reverse - cut rates to save the all-important housing market, even though it will hit the pound and increase import prices and thus inflation.
If makes sense for the Bank to control asset-price inflation as well as consumer prices – but if it had been doing that before we wouldn’t be in this mess now.
