'British interest rates kept too high'

British interest rates have been kept too high for the past few years, a heavyweight parliamentary committee said on Thursday in an uncompromising report. While praising the Bank of England's Monetary Policy Committee (MPC), given control of rates by the government in 1997, as a "real success story", the House of Lords Economic Affairs Committee said it had consistently over-estimated future inflation pressures until 2002 and under-estimated them since.
"The persistence of inflation below target and the continued absence of strong demand factors in inflation are evidence that interest rates have been kept too high," committee chairman Lord Preston said.
The MPC has ratcheted up official borrowing costs to 4.75 percent, in 1/4-point degrees, over the last year. The European Central Bank's rate for the eurozone stands at just 2 percent.
In its quarterly inflation report on Wednesday, the Bank of England signalled rates may now have peaked, saying their present level should allow inflation to rise to the Bank's two percent target in two years.
The committee said Chancellor of the Exchequer Gordon Brown's decision to switch the Bank's inflation target from 2.5 percent on the RPIX measure, to 2.0 percent on the new Consumer Price Index (CPI), needed more scrutiny.
"We note that the actual differences between the CPI and RPIX since the change in target have been much larger," the committee's report said. "We are not convinced that the change of target was properly thought through."
The CPI stood at 1.1 percent year-on-year in September, RPIX was 1.9 percent. The committee took evidence from Brown, Bank of England Governor Mervyns King and many others in preparing its report.
The Bank's inflation report said there were significant risks, which had shifted to the downside. It was particularly concerned about the outlook for oil prices, the housing market and wages.
The parliamentary committee said it would not put the same emphasis on house price inflation as the MPC does, questioned whether it would make the right decisions regarding world oil prices and levelled implied criticism at some of its members.
"The Chancellor should revert to his previous practice of appointing external members of the MPC with acknowledged expertise in monetary economics," its report said. It also questioned its forecasting performance.
"The MPC's forecasting record reveals systematic and persistent errors," the report said. "It is remarkable that the MPC consistently over-predicted inflation until 2002 and after that consistently under-predicted It."