“Posen is right: a dovish approach to UK inflationary pressures is sensible”

I believe that it is currently necessary to maintain interest rates at 0.5%.

There are many reasons behind my belief that current interest rates should be maintained.

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Inflation rate in the UK at March 2011 was around 4%. We are currently in the middle of the most expansionary monetary policy in the history of the UK and this has only generated a rise in inflation to 2% above target. I recognise that inflation has been above target now since late 2009. In the Bank of England Inflation Report, it is predicted that inflation will be significantly above target for 2011 but should fall back quite sharply to around the 2% target in 2012.

As we can see from the diagram the CPI-Y rate which excludes VAT and other indirect taxes is just over the target at around 2.5%. This is a rate which is more focused on core inflation and one which many believe monetary policy should be based on.

As a number of the MPC members have said, it is somewhat tempting to give a temporary rise in interest rates to satisfy the public and the markets that the MPC are still interested in keeping inflation low. However, the main concern is the long term health of the economy and policy should be based on what we expect in the future.

CPI is currently above average due to a combination of the low value of the pound, the high price of commodities and the increase in VAT in January 2011. However, the underlying inflation rate, allowing for exchange rate pressures and the increase in VAT is near target and so I think it would be a mistake to try and correct the current inflation problem.

In David Miles speech[1] he states that, “Inflation could be brought back to target very fast, perhaps even over a few months.” Whilst some may see this as desirable, the aggressive monetary policy needed to make