Britain’s monetary policy: Uncertain times

Posted: May 13, 2015 in economy
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WITH inflation at 0%, setting interest rates at the Bank of England may at first look like an easy job. Launching its latest Inflation Report today, Mark Carney, the bank's governor, confirmed that inflation should be back on target at 2% by 2017. This suggests market expectations of a first rate rise in the middle of 2016 are roughly right. Yet two important messages in the report suggest that setting interest rates is a much harder task for the bank than it may first appear. One area of uncertainty is the scale and impact of the budget cuts that the new Conservative government, elected on May 7th, seeks to implement. The other is the bank's expectation that in the long run, rates will be lower than before the crisis as a result of a long-run stagnation in demand. The size and scale of the responses needed to guard against these risks are uncertain.&nbsp;Top of the list of challenges facing the bank, according to Mr Carney, is responding to fiscal policy. To meet its inflation target, the bank has to respond to cuts in government spending which would weaken demand, lower growth and drag down inflation if left unchecked. The problem is that nobody is sure exactly how much the new government will cut. The Tories have so far only set out the details of where £1.2 billion ($1.8 billion) of their plans to cut £12 billion from the welfare budget will come from, according to …<div class="og_rss_groups"></div>

via Economic Crisis


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