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IEA - Hit pause on interest rates, says IEA expert
Julian Jessop, Economics Fellow at the Institute of Economic Affairs Comments on figures showing that inflation fell by 0.4 percentage points to 10.1 per cent in January
“The Bank of England can now afford to hit the pause button on interest rates — with inflation moving in the right direction along with tighter monetary and financial conditions.
“Headline inflation is obviously still far too high, but the main drivers of inflation have already gone into reverse. In particular, the growth of the money supply has slowed sharply, meaning that the flood of cheap money that fuelled inflation has turned into a trickle.
“Even if prices do no more than stabilise at the current high levels, the rate of inflation will fall sharply. Indeed, it would be disappointing if inflation does only halve this year, to around 5 per cent, which would still be well above the Bank of England’s 2 per cent target.”
Notes to Editors
- The main contributor to the fall in the headline rate was lower fuel price inflation. But core inflation, excluding food and energy, also fell more than anticipated, from 6.3 per cent to 5.8 per cent.
- Food price inflation eased only slightly, from 16.8 per cent to 16.7 per cent. This is the main reason why inflation is higher for low-income households, who spend more of their budget on food. But global agricultural prices have been falling for several months now and this should feed through to the shops soon.
- The statement accompanying the last Monetary Policy Committee (MPC) meeting, when rates were hiked to 4 per cent, implied a bias towards further rate increases, but only if there is evidence of ‘more persistent inflationary pressures’.
- The Prime Minister has set a target of halving inflation by the end of the year, which will be achieved if inflation continues to fall at the same rate as it did in January. However, this will happen anyway even if the government does nothing.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
