Jury is still out as to whether interest rate rise is sufficiently dramatic

Commenting on the decision of the Monetary Policy Committee of the Bank of England to raise interest rates from 0.25% to 0.5%, Kitty Ussher, Chief Economist of the Institute of Directors, commented:

“Business leaders are worried about inflation, and they – rightly – believe it is the Bank of England’s job to get it under control.

“For that reason, the Bank has lost some credibility among business leaders from its too-cautious projections of inflation over the last few months and its failure accurately to interpret the labour market data around the end of the furlough scheme in the autumn.

“Today’s decision therefore needed to surprise on the upside to show markets, and wider business leaders, that it was serious in doing the job it is there to do. It seems that 4 members of the 9-strong Monetary Policy Committee shared this view, and voted for a rise to 0.75%, but this group remained in the minority.

“Therefore, because today’s decision was widely in line with market predictions, the jury is still out as to whether it was sufficiently dramatic to bring expectations of inflation down in the way that is needed to change behaviour and get a handle on the situation.

“The Bank’s own central projection is that annual inflation will peak at 7.25% in April 2022. If in future weeks that, too, looks out of kilter with the data as it comes in, then today’s decision will not have done much to improve the Bank’s dented credibility among business leaders.”