Bank of England should not delay rate cut
17 July 2024
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In the Media
Economics
Tax and Fiscal Policy
19 November 2024
Commenting on news that the rate of inflation remained steady at around 2% in June, Andrew Lilico, Economics Fellow at the free market think tank, the Institute of Economic Affairs, said:
“Inflation held steady in June 2024, at 2.8% on the ONS’ preferred CPIH measure and 2% on the Bank of England’s CPI target measure. Despite this being a slight surprise (relative to expectations of a fall), the Bank of England should not use this as an excuse not to cut interest rates.
“As matters stand, long-term interest rates (as defined by UK 10 year government bond yields) sit at just over 4% whilst the Bank’s short-term policy rate is 5.25%. Thus policy is quite tight relative to the expected long-term norm. What is that tightness seeking to achieve? Inflation is at target now. Monetary growth has been very low (indeed was negative for a long period). There is no problem for tightness to cure.
“The Bank seems overly-concerned by wage data. But wage rises are typically caused by inflation rather than being a cause of it.
“Although recent GDP growth has been fairly robust, and there is relatively little evidence of overly-high interest rates creating immediate other economic problems (e.g. mortgage-holder financial distress), the Bank should be cutting rates now rather than waiting. Monetary policy works with a lag. If the Bank waits until problems are visible, it will have waited too long.”
ENDS
Notes to Editors
Contact: media@iea.org.uk / 07763 365520
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
“Inflation held steady in June 2024, at 2.8% on the ONS’ preferred CPIH measure and 2% on the Bank of England’s CPI target measure. Despite this being a slight surprise (relative to expectations of a fall), the Bank of England should not use this as an excuse not to cut interest rates.
“As matters stand, long-term interest rates (as defined by UK 10 year government bond yields) sit at just over 4% whilst the Bank’s short-term policy rate is 5.25%. Thus policy is quite tight relative to the expected long-term norm. What is that tightness seeking to achieve? Inflation is at target now. Monetary growth has been very low (indeed was negative for a long period). There is no problem for tightness to cure.
“The Bank seems overly-concerned by wage data. But wage rises are typically caused by inflation rather than being a cause of it.
“Although recent GDP growth has been fairly robust, and there is relatively little evidence of overly-high interest rates creating immediate other economic problems (e.g. mortgage-holder financial distress), the Bank should be cutting rates now rather than waiting. Monetary policy works with a lag. If the Bank waits until problems are visible, it will have waited too long.”
ENDS
Notes to Editors
Contact: media@iea.org.uk / 07763 365520
- At its last meeting in May, the IEA’s Shadow Monetary Policy Committee urged the Bank of England to cut interest rates by at least 0.5%.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
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