BoE Policymaker Signals Stop to Rate Cuts, Which May Fire Back

Megan Greene, one of the Bank of England’s (BoE) policymakers, suggested the best way to curb higher inflation would be to skip “some rounds in terms of rate cuts”.

Currently, the base rate is at 4% following from last September meeting with inflation at 3%, nearly double the BoE’s target of 2%. There are signs of inflation falling back to normal levels; however, the recent stickiness (stagnant inflation) from food inflation has subdued its progress.

Greene forecasts food inflation to hit 5.5% before falling. This may be due to the recent effect from retailers having to adjust to a higher minimum wage and payroll tax in the form of national insurance.

An important point that Greene pointed out was the bank’s credibility. If the bank decided to hike rates to stabilise prices further, it could damage’s reputation. This can cause inconsistency in the BoE long-term plan, which can disrupt household aggregate expenditure and cause political pressures, given that the Labour government have signalled lower rates.

Another viewpoint would be if the bank’s credibility starts to falter, policy announcements and decisions can become ineffective since household will anchor their expectations on other forms. This means the bank will be unable to control expenditure and inflation as well.

Credibility is important in the financial world. We can note how governments and firms internationally have recently criticised public offices. For example, the August employment numbers in the US were corrected heavily, which caused Trump to angrily rant about the office’s mistake.

Overall, having a plan is okay, but executing is a different and difficult skill to deploy.