Interest rate rise could be overkill, says IEA expert in response to inflation data

Interest rate rise could be overkill, says IEA expert in response to inflation data

Commenting on news that the rate of inflation hit a higher-than-expected 10.1 per cent in March, IEA Economics Fellow Julian Jessop, said:

“Today’s grim inflation data have boxed the Bank of England into a corner. The Monetary Policy Committee has said that evidence of more persistent inflation would mean that interest rates have to rise further, so another increase next month so another increase next month may now be inevitable.

“It is not all bad news. The latest producer price data confirm that pipeline pressures are easing, including in the food sector where inflation should start to plummet soon. However, the MPC will pay the most attention to the stickiness of ‘core’ inflation, excluding food and energy, which remained at 6.2 per cent, and of services inflation, which was stuck at 6.6 per cent.

“It need not be like this. A more credible central bank would be able to look forward, rather than back, and keep interest rates on hold. There are still many reasons why inflation is likely to fall sharply in the months ahead, including the substantial tightening in monetary and financial conditions which is only just starting to feed through.

“Unfortunately, if your only tool is a hammer, every problem is a nail. The Bank seems set to raise interest rates further, increasing the risks of overkill.”