Stay Calm on Interest Rates The bank’s (BoE) unemployment promise is a constraint, not a trigger. It will raise rates in 2014 only if it thinks there is a risk of inflation rising above its 2% target. But inflation has dropped from 2.9% in June to 2.2% in October. Some of this is because university tuition fees have stopped rising so quickly, with education contributing just 0.2 percentage points to the latest inflation rate (half as much as in previous months). Petrol prices are slowing too, thanks to calmer global oil markets. Inflation is close enough to the bank’s 2% goal to justify keeping rates low. Easy money will remain for other reasons. Some of the fastest-rising prices are ones that the bank’s interest rate can hardly influence. Energy prices are a good example. Five of Britain’s six large energy firms have announced increases which average 8%, adding 0.4 percentage points to the inflation rate. But the root causes of this—factors like global wholesale prices and regulation—are not susceptible to tighter monetary policy. The bank’s rate-setters monitor, but do not react to, this kind of inflation. Stripping away these kinds of prices leaves a “core” inflation rate of 1.7%, well below the target. And the prospects look subdued: the bank sees little price pressure over the next couple of years, with inflation as likely to be below target as above it
Posted on: Sat, 16 Nov 2013 13:31:19 +0000
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