Macro-economists have spent a lot of time and effort trying to decide what should be done once interest rates hit the dreaded “zero lower bound” – 0% or thereabouts. Much of this was in response to the malaise of the Japanese economy, which has been suffering from low growth and deflation since the early 1990’s. Implicit in much of this discussion is that it is hard for central banks to raise prices without being able to use interest rates as a “tool”.
Here’s a comparison of the UK price level (as measured by the Consumer Price Index) in the months since the Bank of England base rate was lowered to 0.5% in March 2009, versus the equivalent CPI measure for Japan since the Bank of Japan base rate hit 0.5% in September 1995; both indices rebased to 100 on the start month.
UK vs Japan CPI, Price Level over Months since hitting Zero Lower Bound. Source: Timetric.
It seems reasonable to conclude the Bank of England is not having much of a problem “creating inflation”. They make it look easy!
For interest, the 2% jump in the Japan CPI at month 20 on the graph corresponds to an increase in the VAT-like consumption tax from 3% to 5% in April 1997. It took the Bank of Japan four and a half years to depress prices back down to their previous level – the kind of price stability which Jean-Claude Trichet can only dream about.
