Commenting on the Bank of England’s decision to cut interest rates to 4.75%, Julian Jessop, Economics Fellow at the free market think tank the Institute of Economic Affairs, said: “The Bank of England was right to cut interest rates again today but should move further and faster. Rates are still higher than necessary to keep bearing down on inflation, especially when the Bank is continuing to tighten policy by running down its holdings of government bonds.
“Indeed, a majority of members of the IEA’s Shadow Monetary Policy Committee voted to cut rates by a half a point rather than a quarter. Inflation is now back close to target and expected to remain there, but the full effects of past increases in interest rates and the deceleration of money growth have yet to feed through.
“The additional uncertainty and market volatility triggered by the Budget and Trump’s victory had prompted some to speculate that the MPC might hold off today. Delivering the rate cut that almost all had expected should therefore help to reassure households, businesses, and investors.
“The Bank has also endorsed the OBR view that the additional spending and borrowing in the Budget will provide a temporary boost to growth and inflation. This could slow the pace of rate cuts in future, though the Bank stuck to its guidance that rates will fall ‘gradually’ (perhaps a quarter point every three months, taking the Bank rate to 3.75% by the end of next year).
“However, the Bank’s forecasts are based on assumptions about the path of market interest rates which already look too optimistic. The increases in taxes and other business costs in the Budget, compounded by the hit to confidence, should also limit any upsides to growth or inflation.
“The Bank acknowledged the uncertainties here, implying rates could still be cut more quickly. But there is a clear risk that the MPC is too slow to respond.”
