Bank of England’s lost credibility left little choice

Commenting on the Bank of England Monetary Policy Committee’s decision to raise Bank Rate by 50 basis points to five per cent, Julian Jessop, Economics Fellow at the free market think tank The Institute of Economic Affairs, said:

“A more credible central bank might have been able to leave interest rates on hold today. Indeed, two members of the Monetary Policy Committee (MPC) voted to do just that. The full impact of previous rate increases has yet to be felt and there are still good reasons to expect inflation to fall sharply over the remainder of the year, including the rapid deceleration in the growth of money and credit.

“Unfortunately, confidence in the Bank is low after a series of policy mistakes, forecast errors and communication blunders. This MPC was forced to raise rates by an unexpected half a point to demonstrate that it is serious about getting inflation back down — along with signalling that further rate rises could be on the way.

“It is uncertain that rates will have to go up again. The bigger increase today may have bought the MPC a little more time. Clearer evidence that underlying price pressures are fading should mean that the peak in UK interest rates will be nearer the current level of 5 per cent than the 6 per cent or more that many fear.”