Bank of England. On Thursday, the UK central bank meets to decide on interest rates amidst a rising inflationary environment. Currently, the BOE is holding their asset purchases at 200 billion GBP and their overnight interest rates at 0.5%. The Monetary Policy Committee will struggle to decide if they need to raise interest rates when inflation is about double their 2% target and UK growth might be negatively impacted by government cuts in spending. On January 13th, two members of the committee voted to raise interest rates as they were concerned that inflation would become entrenched.
The question of inflation is one that is salient for all the central banks in the world. Emerging markets are particularly struggling with increases in food and energy as soaring commodity prices are pushing up consumer price indexes. As the Economist points out, China’s inflation rate is hovering around 5%, Brazil’s is approaching 6% and India’s remains close to 10%. Even in enfeebled rich economies the “I” word is back on the front pages. Britain’s consumer prices rose 3.7% in the year to December.” The problem for the central banks is timing: when will the inflection point occur where a first round commodity price increase leads to a second round wage increase?
Bernanke testifies on budget. Wednesday, Federal Reserve chairman Ben Bernanke testifies at a hearing of the House Budget Committee on “The Economy, Jobs and the Budget.” Ostensibly, this will be an opportunity for Bernanke to link the problems of the fiscal deficit to creating economic and job growth for the US economy. It will also offer an opportunity for new Budget Committee Chairman Paul Ryan to ask questions about Fed policy and fiscal policy over the last two years. While Bernanke will no doubt defend both, he will be obligated to delineate which policy had a larger short run impact and which policy was more successful in its goals.