BoE rate rise a clear signal of a change in policy, says economist
3 February 2022
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Press Release
Press Release
Lifestyle Economics
15 November 2024
Commenting on the decision by the Bank of England to raise interest rates to 0.50 per cent, Dr Juan Castañeda, member of the Institute of Economic Affairs’ Shadow Monetary Policy Committee and Director of the IIMR, said:
“Today the Bank of England has sent a clear signal of a change in policy to tackle the current inflation episode. The Monetary Policy Committee (MPC) has decided to increase the policy rate by 0.25 percentage points, up to 0.50 per cent, and most notably to start to reduce its stock of both UK government bonds and sterling corporate bonds. The Bank will cease to reinvest maturing bonds and will also start a corporate bonds sale programme. The Bank may even consider the active sale of government bonds once the policy rate has reached at least 1 per cent.
“The rise in inflation in recent months has caught the Bank of England by surprise. In its February meeting, the MPC acknowledged that inflation above the 2 per cent target will persist until 2024, which is mainly attributed to Covid-19 pandemic factors and rising energy prices.
“The Bank seems to have paid little attention (if any at all) to the extraordinary rate of growth in the amount of money broadly defined in 2020 and 2021, which reached a 30-year record high of 15.2 per cent annual growth rate in April 2021. Even though the annual rate of growth of money has decelerated in recent months (down to a 6.4 per cent, according to the latest data), this figure is still too high and not compatible with price stability. Due to the usual lags between changes in the amount of money and inflation, it is the surge in the amount of money since March 2020 that explains the current inflation episode.
“Despite today’s policy decisions, the operation of these lags implies that inflation will likely persist in the 5-10 per cent range into 2023 and inflation will not return to the 2 per cent inflation target until the annual growth rate of broad money is reduced.”
Read the minutes of the latest IEA Shadow Monetary Policy Committee’s meeting here.
“Today the Bank of England has sent a clear signal of a change in policy to tackle the current inflation episode. The Monetary Policy Committee (MPC) has decided to increase the policy rate by 0.25 percentage points, up to 0.50 per cent, and most notably to start to reduce its stock of both UK government bonds and sterling corporate bonds. The Bank will cease to reinvest maturing bonds and will also start a corporate bonds sale programme. The Bank may even consider the active sale of government bonds once the policy rate has reached at least 1 per cent.
“The rise in inflation in recent months has caught the Bank of England by surprise. In its February meeting, the MPC acknowledged that inflation above the 2 per cent target will persist until 2024, which is mainly attributed to Covid-19 pandemic factors and rising energy prices.
“The Bank seems to have paid little attention (if any at all) to the extraordinary rate of growth in the amount of money broadly defined in 2020 and 2021, which reached a 30-year record high of 15.2 per cent annual growth rate in April 2021. Even though the annual rate of growth of money has decelerated in recent months (down to a 6.4 per cent, according to the latest data), this figure is still too high and not compatible with price stability. Due to the usual lags between changes in the amount of money and inflation, it is the surge in the amount of money since March 2020 that explains the current inflation episode.
“Despite today’s policy decisions, the operation of these lags implies that inflation will likely persist in the 5-10 per cent range into 2023 and inflation will not return to the 2 per cent inflation target until the annual growth rate of broad money is reduced.”
ENDSNotes editorsContact: Annabel Denham, Director of Communications, 07540 770 774
IEA spokespeople are available for interview and further comment.
Read the minutes of the latest IEA Shadow Monetary Policy Committee’s meeting here.
You can download a copy of the IEA paper ‘Inflation: The next threat?’ here.
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