Commenting on the Bank of England’s decision to cut Bank Rate by 25 basis points to 5%, Julian Jessop, Economics Fellow at the free market think tank, the Institute of Economic Affairs, said:

“The Monetary Policy Committee’s decision to cut interest rates to 5% this week was finely balanced but surely correct. The aim should now be to return rates to a neutral level of around 4% by early next year.

“The Bank’s own economic forecasts point the way. Inflation is expected to pick up temporarily in the second half of this year, but then fall back to 1.7% in two years and to 1.5% in three years, even based on market expectations of further rate cuts.

“The economy has been a little stronger than expected, but this is partly based on hopes that falling inflation will be followed by falling rates. The Bank needed to deliver in order to sustain the recovery.

“Even at 5%, interest rates are still high and will therefore continue to bear down on inflation, especially as the Bank is persisting with ‘quantitative tightening’ as well.

“There are still some reasonable concerns about services inflation. But with overall inflation still forecast to fall below the MPC’s 2% target over the medium term, leaving rates on hold would have been more damaging for credibility than a small cut.”

ENDS

Notes to Editors

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

The latest meeting of the IEA’s Shadow Monetary Policy Committee, of which Julian is a member, urged the Bank of England to cut interest rates immediately. The group of independent economists who shadow the Bank have raised concerns that a slowdown in the money supply could cause an economic slowdown unless the MPC changes course.

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.