Interest Rates Frozen at 0.1% pa Again

Published / Last Updated on 23/09/2021

The Bank of England Monetary Policy Committee (MPC) has yet again met to set the UK’s monetary policy to deliver inflation targets set by government with a key area for managing inflation being to set the Bank of England’s base rate.

Key Points:

  • Government inflation target is set at 2% pa (allegedly).
  • 8 days ago the Office for National Statistics released August’s inflation figures:
    • CPI Inflation is at 3.2% pa.
    • RPI inflation is at 4.8% pa.
    • The ONS suggested that inflation figures are artificially high given that last year, food, travel and leisure prices were subsidised with ‘Eat Out to Help Out’, so underlying inflation is not that high.
    • Both measures, although RPI is no longer used as an official statistic, are way above the government’s target.
  • Bank of England MPC voted unanimously to keep interest rates at 0.1% pa.
  • Wholesale Oil and Gas prices have increased by 250% since January 2021.
  • There is a CO2 shortage impacting on food production and prices, meaning shortages and price rises will occur as well as empty shelves.
  • Used car prices are rising due to a global microchip shortage.
  • Haulage driver shortages, or indeed huge pay increases, will also impact on prices of goods again forcing them up as well as shortages.  There is talk of panic buying and empty shelves in the run up to Christmas.

Comment

Inflation is way above its target.  We have suggested before and we repeat our belief that the Bank of England will follow the Federal Reserve in the USA in that 'the Fed' stated that it will "not use interest rates to control inflation for the foreseeable future" and we will likely only see two interest rates increases towards the end of 2023 where they are forecast to increase from 0.1%pa to 0.6%pa.

Mirrored interest rate policy with the USA presents stables exchange rate for £:$ which bodes well as trade deals between UK and US.  In addition, whilst higher inflation is not good for the economy it is great for public sector debt e.g.  devaluing covid-19 debts before they are due to be repaid say in 10, 15 or 20 years.

We suggest you watch our video:  70 Yrs of RPI answering how inflation has trended after economic shocks over the last 70 years.

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