Many people have been baffled by the Bank of England’s decision to raise interest rates by a historically large three-quarters of a point this week, despite forecasting that the UK economy is sliding into recession. I understand this confusion, but there are three reasons why rates had to be increased.
First, the job of the Bank’s Monetary Policy Committee (MPC) is to worry about inflation, not growth. Some might like to change the MPC’s mandate, but for now it is tasked with keeping inflation at 2%. Currently inflation is over 10%, and forecast to remain high. With inflation now having spread well beyond food and energy prices, the MPC needed to act to prevent a temporary inflation shock from becoming permanent.
Second, the starting point is important. Even after the latest increase, UK interest rates of 3% remain historically low, and are firmly negative in real terms (after allowing for inflation)…
View original post 515 more words
Utopia, you are standing in it! 
Recent Comments