Tax and Fiscal Policy

Monetary policy remains too tight for comfort, says IEA Economics Fellow


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Responding to the Bank of England’s decision to hold interest rates at 5%, Julian Jessop, Economics Fellow at the free market think tank, the Institute of Economic Affairs, said:

“The Bank of England’s decision to leave interest rates on hold this week is no surprise but still disappointing.

“The MPC judged that there had not been enough economic news since August to justify another cut. This is hard to square with the signs of a further easing in inflation pressures and weaker economic growth, both in the UK and abroad.

“Indeed, the Bank has revised down its forecast for the temporary uptick in UK inflation when domestic energy bills rise later this year, from 2¾% to 2½%.

“The MPC also announced another £100 billion of gilt sales – a process known as ‘Quantitative Tightening’ (QT). The continued normalisation of the Bank’s balance sheet will have some benefits, but it will add to the economic headwinds from the current restrictive level of interest rates.

“The Bank is therefore playing a dangerous game. Fortunately, investors are expecting more cuts over the coming months, which is already feeding through into lower borrowing costs, including mortgage rates. The markets are therefore doing the MPC’s job for them.

“Nonetheless, the MPC will still have to fulfil these expectations – and perhaps go further. The upshot is that the Bank may now have to copy the US Fed with a bigger half point cut at the next meeting in November.”

ENDS

Contact: media@iea.org.uk / 07763 365520

Notes to Editors

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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