The Bank of England and the government are “pulling in different directions” on interest rates
The Bank of England and the government are “pulling in different directions” on interest rates

The Bank of England and the government are “pulling in different directions” on interest rates

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The Bank of England (BoE) and the government are “pulling in different directions” on the best steps to take to control inflation and avoid a recession, the former deputy governor of the central bank has warned.

Sir John Gieve, a former BoE deputy governor and member of the rate-setting Monetary Policy Committee (MPC) from 2006 to 2009, said the government’s efforts to grow the economy were not compatible with efforts to raise the rate.

He also predicted that the UK could already be in recession, which could lead to “very little growth over the next year or so”.

The Bank is expected to raise interest rates by 0.75 percentage points to 2.5% when it meets later today. He hopes to reduce the purchasing power of households to reduce the speed at which prices rise.

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Meanwhile, the chancellor is expected to unveil a program of tax cuts and other measures to boost growth in a “mini-budget” on Friday.

I’m talking to the bbc this day Sir John said he agreed with the market consensus that the Bank would achieve a 0.75 percentage point rise in interest rates, which would be its biggest rate rise since 1989.

“They need to do at least that, there is an argument to do more, especially as interest rates are rising by 75 basis points in Europe and the US,” he added.

“If it’s the right level, I’m less clear. But I expect rates to go up in future meetings.”

Asked if the BoE and the government were taking different directions on the economy, Sir John said: “Yes.”

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“The BoE is concerned about inflation, which is at 10% but should be at 2% and believes that this is due to energy prices and because demand in the economy is outstripping supply.

“They are trying to slow down the economy, while the rhetoric of the new government is that they want to speed it up by increasing debt. They’re pulling in different directions.”

He added that any attempt to promote economic growth must have a “long-term agenda” to be successful.

“There’s an argument that lowering tax rates increases incentives and encourages growth, but that’s something that works over a period of years, not months,” he said.

“I think we’re still in a recession, we may already be in a recession now, and I think we’re going to see very little growth in the next year.

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“The Bank’s view will be that we need this break to control inflation. To the extent that additional government borrowing stimulates demand, I think they will feel they have to offset that in the short term by raising interest rates.”

Sir John also noted that while government measures to cap energy bills meant households were “better off than they would have been”, households were worse off in real terms.

“That will slow down the economy,” he said. “The combination of lower household incomes and higher interest rates can and will reduce inflation, but of course it will come at the price of higher unemployment and lower growth. That’s the outlook for the next year or two.”

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Source : zonadeprensard.com