OMFIF’s chief economist, Neil Williams, has provided a comment on today’s Bank of England rate rise:
‘By raising rates today – the fifth hike since December – the Bank of England is trying to reclaim its cherished policy tool. But further moves may be limited. With UK activity weakening and inflation predominantly the ‘wrong sort’ – cost, rather than demand, driven – we’re unlikely to end up at previous policy-normal settings. With stagflation building, the monetary policy committee is rightly hesitant to do more. Real rates could remain negative for another two years in the US, Japan, euro area and UK. For the UK, this adds to the 13 already experienced.
So, to take some of the heavy lifting away, it makes sense to pull harder on the other lever – quantitative tightening. Passive QT (letting assets roll off the balance sheet by no longer reinvesting) is the gentlest way of tightening – in effect, by doing nothing. But ratcheting this up to active QT (starting to sell some of the Bank’s assets) would allow Bank Rate to peak lower than otherwise. It would also give comfort that the MPC is not falling ‘behind the curve’. And it may even go some way to reducing the downside of quantitative easing – evidenced by asset price distortions, suppressed saving and funding strains on many pension schemes.’
