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Minding the inflation gap is a tough job

There’s an old saying that perception is reality to some people. It is clear that the three rate rises since August have made many mortgage customers sit up and take notice, and the January rise was an unpleasant surprise.

The question of perception and reality is rele-vant to the recent rise in what was an incredibly low base rate. From a low point of 3.5% in July 2003, rates have moved upwards in 0.25% steps.

The result is that the small rises have not had the desired effect when it comes to curbing inflation. Consumers have become used to rates at low levels. This leaves the Bank of England facing some unpalatable truths. What is its prime directive? Take a look at the BoE’s website. The figures make for uncomfortable reading – inflation 3%, inflation target 2%.

I guess we can all be amateur Monetary Policy Committee members but how have things come to this? Was it the case that the committee procrastinated when it should have taken decisive action? Perhaps a firmer hand on the tiller? Right now 1% looks a big gap to close. I wish everyone at the MPC the best of luck in achieving this as painlessly and as quickly as possible.

The problem is that many consumers have learned to live in a cheap credit world. They have a vague notion of economic cycles but don’t know how these affect them.

With consumer credit at high levels, the pressures of the rate rises will soon begin to show. The growth in consumer credit has been rapid although it is true that consumer credit take-up slowed in the second half of 2006, particularly in the credit card market. In December alone unsecured personal lending rose by £0.1bn, in line with the recent monthly average.

Loans and overdrafts rose by £0.4bn, with credit card borrowing falling by £0.3bn, according to the British Bankers’ Association. But these figures don’t show the record previous highs and the rapid growth in personal credit.

The next obvious step is to factor the rate Simon biddle rises into credit score cards. It must be true that unsecured credit will be harder to obtain in 2007.

The high level of individual voluntary arrangements has shocked some in the financial industry and the corridors of power. Has the Enterprise Act 2002 delivered a perfect example of the law of unintended consequences? IVAs in the first quarter of 2007 are set to dwarf those in the whole of 2006 – and that was a record year.

Where does all this leave us? Looking anxiously towards the next inflation figures and the next MPC meeting ann-ouncement, that’s where. Cross your fingers. Right now the inflation to target gap of 1% looks like a gulf. I hope closing it doesn’t mean too many more rate rises.

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