Interest rate rise is “too little too late”, warns IEA economist
17 March 2022
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Commenting on the Bank of England’s decision to raise interest rates from 0.5 per cent to 0.75 per cent, Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, said:
“The Bank of England has again chosen to do the bare minimum. Today’s 0.25 percentage point increase in interest rates, to 0.75 per cent, was no more than the markets had expected and simply takes rates back to their pre-Covid level.
“Fears that further hikes will hold back the economy are misplaced. The real threat to economic growth and living standards would come from a sustained period of high inflation, not what are still only small changes in short-term interest rates.
“Official interest rates are still exceptionally low by any standard and especially in real terms, after allowing for inflation. Indeed, with the CPI measure now expected to top 8 per cent, raising nominal interest rates by just a quarter of a point hardly counts as monetary tightening at all.
“A bolder move would have sent a clearer signal that the Monetary Policy Committee is serious about getting inflation back under control. Instead, by continuing to act timidly, the Bank is increasing the risk that a temporary inflation shock persists for even longer. The MPC needs to ‘get real’ to restore credibility.
“The Bank has at least begun the process of reversing the extraordinary stimulus from quantitative easing (QE). Now that the Bank is no longer reinvesting the proceeds from maturing UK government bonds, the stock of gilts it holds under QE has fallen from £875 billion to £847 billion.
“This ‘passive quantitative tightening’ will dampen the excess monetary growth that has fuelled the surge in inflation. But it may also be too little and too late.”
ENDS
Notes to editors
Contact: Emily Carver, Head of Media, 07715 942 731
IEA spokespeople are available for interview and further comment.
“The Bank of England has again chosen to do the bare minimum. Today’s 0.25 percentage point increase in interest rates, to 0.75 per cent, was no more than the markets had expected and simply takes rates back to their pre-Covid level.
“Fears that further hikes will hold back the economy are misplaced. The real threat to economic growth and living standards would come from a sustained period of high inflation, not what are still only small changes in short-term interest rates.
“Official interest rates are still exceptionally low by any standard and especially in real terms, after allowing for inflation. Indeed, with the CPI measure now expected to top 8 per cent, raising nominal interest rates by just a quarter of a point hardly counts as monetary tightening at all.
“A bolder move would have sent a clearer signal that the Monetary Policy Committee is serious about getting inflation back under control. Instead, by continuing to act timidly, the Bank is increasing the risk that a temporary inflation shock persists for even longer. The MPC needs to ‘get real’ to restore credibility.
“The Bank has at least begun the process of reversing the extraordinary stimulus from quantitative easing (QE). Now that the Bank is no longer reinvesting the proceeds from maturing UK government bonds, the stock of gilts it holds under QE has fallen from £875 billion to £847 billion.
“This ‘passive quantitative tightening’ will dampen the excess monetary growth that has fuelled the surge in inflation. But it may also be too little and too late.”
ENDS
Notes to editors
Contact: Emily Carver, Head of Media, 07715 942 731
IEA spokespeople are available for interview and further comment.
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