Interest rates decision risks damaging Bank of England’s credibility, says think tank

Commenting on the Bank of England’s decision to hold interest rates at 0.1 per cent, Julian Jessop an 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% 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.

UK Interest Rates

“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.”

The Bank of England’s Monetary Policy Committee (MPC) have said that it will keep interest rates at 0.1%.

At its meeting on Tuesday, the Committee judged that the existing stance of monetary policy remained appropriate. The MPC voted by a majority of 7-2 to maintain Bank Rate at 0.1%.

The Bank said today that its Committee voted by a majority of 6-3 for the Bank of England to continue with its existing programme of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so the total target stock of asset purchases at £895 billion.