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Bank of England hawks defeated by economic crisis

A 9-0 vote at the MPC is almost as good as Ben Bernanke’s statement last week that the Fed would keep interest rates low until 2013

So the hawks have finally fallen off their perch. Even after the departure of their ringleader, the pugnacious Andrew Sentance, they clung on for a couple of months, arguing for higher interest rates in the face of a deteriorating economy and the implacable opposition of Mervyn King.

But now it seems the mounting debt crisis in the eurozone was enough to change their minds. At the MPC’s latest meeting a fortnight ago, Martin Weale, former director of the National Institute for Economic and Social Research, and Spencer Dale, the Bank of England’s chief economist, surrendered. They are, as the Monty Python team might have put it, ex-hawks.

For the financial markets, this is almost as good as Ben Bernanke’s statement last week that the Fed would keep interest rates low until 2013. No one is now arguing against King’s carefully articulated view that although above-target inflation is painful for consumers trying to make ends meet, bringing it back to the 2% target rapidly would come at much too high a price, in terms of lost output and jobs.

That view was underlined by Wednesday’s jobs figures, which show that unemployment jumped by 38,000 in the three months to June, even before clear evidence of the soft patch in our major trading partners, the US and Europe, had emerged.

Businesses and consumers should be thankful that King got his way. In the eurozone, where Germany has been dragged from continental powerhouse to British-style laggard, and France’s economy has ground to a halt altogether, Jean-Claude Trichet’s two interest rate rises since the start of the year have hardly been a triumph. In fact, they may go down as one of the greatest policymaking errors since — well, since the ECB raised rates in the spring of 2008, just before the eurozone plunged into the deepest recession in living memory.

King was stung by the criticism the Bank faced back then, by MPC member David Blanchflower among others, for failing to cut rates far and fast enough as the credit crunch took hold. This time, he’s on the intellectual high ground, arguing throughout the recovery that raising rates was too dangerous to contemplate. However, being right won’t protect us if the euro crisis goes from bad to worse. With the hawks now in retreat, the MPC could be writing to George Osborne to request the ammunition for another round of quantitative easing within months. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds