Interest rates decision risks damaging BoE’s credibility, says IEA economist


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Commenting on the Bank of England’s decision to hold interest rates at 0.1 per cent, Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, said:

“The Bank of England’s decision to leave interest rates on hold today is defensible, but risky.

“Inflation is set to rise further above the 2 per cent target and ‘transitory’ pressures have already been both larger and longer lasting than expected. The economy has also recovered to the point where it is no longer necessary to keep rates at emergency lows.

“Acting now would have helped to restore credibility and keep inflation down over the longer term. This matters far more than the immediate impact on borrowing or saving rates.

“Even if raised today to 0.25 per cent, as recommended by the IEA’s Shadow MPC, UK interest rates would still be exceptionally low (they were 0.75 per cent before the pandemic).

“A 0.15 percentage point increase in short-term interest rates would also have added less than £2 billion to the annual cost of servicing UK government debt. A prolonged period of high inflation is a bigger risk here too.

“The MPC members voting for a delay have argued that there is still a high level of uncertainty about the labour market. Nonetheless, the latest survey evidence shows that wage and cost pressures are still building, and that the risks on inflation are skewed to the upside.

“By holding back today, the Bank could damage its credibility and end up having to raise rates more in future.”

ENDS

Notes to editors

Contact: Emily Carver, Head of Media, 07715 942 731

IEA spokespeople are available for interview and further comment.

You can read the minutes from the IEA’s latest Shadow Monetary Policy Committee meeting here, where members voted unanimously to raise interest rates.



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