Why the Bank of England could make a mistake with interest rates

According to the Bank of England’s chief economist, Huw Pill, the UK economy is like a fragile flower. Despite all the negative rhetoric, the economy is not doing too badly, and private sector forecasts show that it is a bit stronger than previously thought. However, a danger could choke off growth if a dump of snow is dropped on it. The dump could come from the upcoming Budget next week where there is a focus on the expected improvement in public finances that may lead to plans to increase taxation.

While it is understandable that you want to right a wrong (in this case, the Bank’s slow movement in increasing interest rates), it does not mean you should overcompensate and make the opposite mistake. Voters are not gullible, and it is better to do what is right for the economy now rather than what might or might not be right for the upcoming elections. The bigger impact on the economy will be what happens to interest rates, and there is a possibility that the Bank of England will make a mistake in pushing rates up too much.

This is an opinionated and honest journalist’s take on the situation, and we go into more detail on what is happening and what could happen next below.

Jeremy Hunt beware: voters aren’t gullible.

Next week’s focus will be on the Budget and, in particular, to what extent the expected improvement in public finances should allow Jeremy Hunt to ease up on his plans to increase taxation. It is easy to assume that tax cuts should come next year when the Government is closer to the next election rather than now. However, voters are not so gullible, and it is better to do what you think is right for the economy instead of what might be right for politics in a year. Therefore, there is a possibility that Jeremy Hunt will need to re-think his plans if the situation calls for it.

Why the Bank of England could make a mistake

The Bank of England, like any other central bank, exists to keep inflation under control. Andy Haldane, who left the Bank until June 2021 and is now the chief executive of the Royal Society of Arts, was one of the “hawks” of the monetary policy committee who pushed the policy of increasing interest rates early to head off inflation. Instead, he thinks that they should approach the goal of getting ting inflation down to the target of 2% more flexibly ore slowly.

In an interview with Bloomberg, Haldane said, “Given the amount of tightening already in the system from last year, and given the flickerings of growth from a low base, I’d be going cautiously just at the moment before embarking on a further round of sharp tightening certainly.” He suggests they should not change the inflation target, but the Bank could aim to get inflation down over three or even four years. Therefore, there is a possibility that the Bank of England could make a mistake in pushing rates up too much instead of taking a more flexible and gradual approach.

Related Facts

• The Bank of England’s main mandate is to target inflation of 2%.
• Inflation in the UK increased by 4.2% in October 2021, the highest since December 2011.
• The Bank’s monetary policy committee is set to decide on interest rates on December 16th.
• The UK is facing supply chain and worker shortages that pressure prices.

Key Takeaway

The UK economy is fragile, and any sudden changes in taxes or interest rates could harm growth. So while Jeremy Hunt may have plans to increase taxation, it is better to do what is right for the economy now rather than politically expedient later. Similarly, the Bank of England needs to take a more flexible and gradual approach to interest rates instead of hitting the economy with another round of sharp tightening.

Conclusion

As the UK faces inflationary pressures and supply chain issues, the Government and the Bank of England must take a measured and gradual approach to manage the economy. Tax cuts and interest rate hikes should not be made for political reasons but to ensure economic stability and growth. The Bank’s monetary policy committee will meet next week to decide on interest rates, and it remains to be seen what approach they will take.