Bank of England at significant risk of overcorrecting
Commenting on the Bank of England’s decision to raise interest rates by 0.25 basis points to 4.5%, Trevor Williams, chair of the Institute of Economic Affairs’ Shadow Monetary Policy Committee and former chief economist at Lloyds Bank, said:
“The Bank of England helped create the inflation problem, then said there wasn’t a problem, then called it ‘temporary’, and now runs a significant risk of overcorrecting.
“Just as the Bank of England failed to identify inflationary pressures at the tail end of the Covid-19 pandemic, they may be once again focusing too much on present inflation rather than long run trends. The sharp reduction in the money supply points towards inflation coming down quickly over the coming two years. The UK’s sluggish economic growth, easing supply chain pressures and a series of recent bank failures also point against the need for further rate rises.
“Inflation could still dip to around 1% over the next two to three years and even after adjusting for the Bank’s revised forecast suggesting stronger growth, it is expected to undershoot the 2% target. This trajectory indicates interest rates need not go up any further.”