Monetary Policy

The Bank of England must raise interest rates next month, urges IEA economist


Commenting on the latest ONS inflation data, Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, said:

“Most commentators are still blaming the latest rise in UK inflation, to 9.4 per cent in June, on supply shocks, including higher food and energy prices and labour shortages. But these factors only determine what is happening to relative prices. The overall level of inflation depends, above all, on monetary drivers.

“It is true that inflation has also surged in other countries. Inflation was 8.6 per cent last month in the euro area, 9.1 per cent in the US, and 9.6 per cent on average in the EU as whole. ‘Brexit Britain’ is therefore not the outlier that some seem to think.

“Nonetheless, inflation has remained much lower in many other economies, including Japan, Switzerland and China. It is surely worth asking why, rather than dismissing the recent surge in inflation as ‘global’.

“The Bank of England is also reluctant to acknowledge that monetary factors have played a significant role in driving inflation. But if this is right, why is the Monetary Policy Committee (MPC) preparing to unwind ‘quantitative easing’? This is a policy which works, at least in part, by boosting the money supply.

“It was at least good to hear Andrew Bailey stress last night that a half point increase in interest rates will be on the table when the MPC meets next month. However, several members have already voted for a half point hike at the last few meetings, only to be overruled. This time the Bank needs to deliver.

“A 50 basis point increase in August is the bare minimum required to help to restore some credibility in monetary policy. Fears that would tip the economy into recession are exaggerated. Interest rates would still be near historic lows and firmly negative in real terms (after allowing for inflation). But a bolder move would send a stronger signal that the Bank of England is serious about getting inflation back down again.”

ENDS

Notes to editors

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IEA spokespeople are available for interview and further comment.



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