Articles > The Bank of England’s Next Move

Until as recently as a few weeks ago, it was widely predicted by pretty much everyone in the know that the Bank of England would be dropping interest rates at least twice more this year in order to fend off a recession in the economy.

As inflation continues to be above the 2% targeted mandate of the Bank of England, this looks less and less likely. With inflation hovering around 3%, the Bank of England will soon be forced to take decisive action to bring the numbers until control.

Unfortunately for most home owners, the Bank only has one tool at its disposable to control the pace of growth of the economy; interest rate adjustments.

Now, it is not only predicted that rates will not fall this year, it seems more and more likely that rates will have to rise at least a couple of times in order to bring inflationary pressures under control. Effectively, this means short-term pain for long-term gain.

The 90s and now

Not all is gloom and doom. In the 90s, when interest rates rocketed overnight to over 13%, the forces at work were slightly different. The interest rates at that time were set by the chancellor.

The problem with this setup was that, effectively, a politician was in charge of setting interest rates. This conflict of interest led the government at the time to hold interest rates at an artificially low rate for a time. When the pressure became too great, the chancellor was forced to raise the rates very dramatically in order to bring inflationary pressure under control.

When labour came into power, one of the very first decisions they made was to give the Bank of England the power to make its own decisions. Its mandate is to keep inflationary pressure in check, thereby acting to take the politics out of monetary policy.

As a result, the Bank is now empowered to act decisively to make corrections, without political pressure. This was evidenced only a couple of years ago. House prices were steaming ahead, and before anyone noticed any weakness in the economy, the Bank announced a number of rate rises in succession to curb inflation.

Hopefully, we can expect the same result this time.

Another solution? The main drivers behind the raise in inflation are increased food prices and increased food prices. While arguably there may be little the government can do about food prices, they certainly have the power to reduce taxes in petrol. Yes, they would have less income for Westminster coffers, but it would certainly act to reduce the pressure.