MPC to start cutting rates soon

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Posted by Paul Williamson on September 4, 2008 1:43 PM

Roger Bootle, Economic Adviser to Deloitte, responds to September's MPC meeting

Lingering inflation concerns kept the Monetary Policy Committee's finger off the interest rate trigger again today. But it is only a matter of time before it is forced to respond to the rapidly deteriorating outlook for the economy by cutting rates very aggressively.

It is not hard to see why the MPC decided to stand pat for the fourth consecutive month at today's meeting. At 4.4% in July, inflation is more than double the Committee's 2% target and likely to head towards 5% as recently announced gas and electricity hikes hit the index.

That means that the Governor, Mervyn King, will have to write a series of further letters (one every three months) to the Chancellor explaining why inflation is so high. Against that background, the Committee may have feared that a rate cut today would have given the impression that it is targeting growth, not inflation.

But worries about the inflation outlook are likely to ease significantly over the coming months. After all, the recent fall in the oil price - if sustained - means that the upward influence of energy prices should soon start to fade rapidly.

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MPC hamstrung by inflation fears

Posted by Paul Williamson on March 6, 2008 2:21 PM

Roger Bootle’s response to March’s MPC meeting

Today’s decision by the Monetary Policy Committee to leave interest rates on hold at 5.25% shows how the Committee’s inflation fears are limiting its ability to respond to the economic slowdown. While interest rates will be cut further, the slow pace at which they are falling will make the economic downturn that much sharper and that much longer. The result will eventually be even lower rates than otherwise. 4% is not a silly figure.

It has become clearer that the economy needs a further dose of policy medicine. With the Nationwide recording the fourth fall in house prices in as many months in February, the news on the housing market has worsened. And with many lenders now refusing to provide mortgages to borrowers without a deposit of 10%, further falls in house prices are on the cards.

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