The Balancing Act of Interest Rates and Inflation
by Ritchie Mehta (02 November 2008)
According to the National Office of Statistics inflation is a growing problem in the UK. There has been a continual upward trend measured by the Consumer Prices Index (the official index the government uses to measure inflation) up from 4.7% in August to 5.2% in September . This trend can be largely attributed to a rise in household services such as gas and electricity as we have seen these prices soar over the past year. Interestingly, foods such as fruit, breads and cereals, typical culprits for price increases at the beginning of the year are helping to create a downward push on the index. So although a mixed bag, overall the figures show growing signs that living in the UK is starting to get very expensive.
So what is the government doing about it? Well, controlling inflation is in the hands of the Monetary Policy Committee who manipulate the UK base rate to ensure inflation is kept at bay. The government’s directive to that independent Bank of England committee is that the inflation target is 2%. The committee meet once a month to decide on any relative change they should make. In October, with the prospect of recession right around the corner and the ongoing financial turmoil the MPC decided to take decisive action to curb recessionary risks by decreasing the interest rate by .5% to 4.5%.
The next MPC meeting is this week and it is widely expected that another half point cut will be instructed. Some commentators are looking for a full 1% cut. Such a sizeable cut would indicate significant concern and an almost panicked approach to the economic woes. The MPC is not known for bold cuts like this - it'll be interesting to see not "if" by "how much" they cut interest rates.