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Monetary Policy - Bank of England walks tightrope on interest rates

Graham Watson

15th February 2022

Larry Elliott looks at the monetary policy dilemma facing the Bank of England - what to do with interest rates in response to inflation.

It's not straightforward - or rather, it doesn't seem to be straightforward as far as the Bank is concerned.

On the one hand, there are those who believe that the bank was perhaps a little bit slow in raising rates at the end of 2021, and is now playing catch-up, but others argue that it has lost much of its hard-won credibility by starting to increase rates at a time when there's little evidence of labour markets generating inflationary wage growth.

It's difficult to take a view - these are still unprecedented times, and provided that the Bank moves with caution, I don't think that it's either 'let the genie out of the bottle' or created the conditions for a post-pandemic recession. But I'm prepared to be wrong. And I suspect that some of the commentary associated with the issue probably makes policymaking harder, increasing the noise around the market.

Ian Stewart's latest Deloitte Monday Briefing is also excellent background on the inflation issue.

The latest labour market data has been released and is in line with expectations: unemployment down to 4.1%, job vacancies up, again, and falling real pay between October and December, with the rate of wage growth lagging behind inflation.

Here is another manifestation of the cost of living crisis for Londoners with the cost of public transport set to rise by almost 5% from next month as Transport for London boosts fares.

The Mayor of London, Sadiq Khan, is arguing that the extent of the rises necessary is entirely due to the government's unwillingness to appropriately fund the network.

Economics of Inflation - The Wage-Price-Spiral - A Level and IB Economics

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