MPC decision: Never mind the disease, beware of the cure

The Bank of England (BoE) has kept interest rates at 5.25% and the governor has said he is “optimistic that things are moving in the right direction.”

Andrew Bailey said there is “encouraging news” of inflation and between April and June he is expecting it to come close to 2%.

Bailey added, “We need to see more evidence that inflation will stay low before we can cut interest rates.”

Nicholas Hyett, Investment Manager at Wealth Club, said, “The Bank of England continues to diagnose persistent inflation as the major danger facing the UK economy. However, it’s an increasingly delicate balancing act, and there’s a real risk the economic cure might end up being worse than the disease.

To be fair the picture is murky. The market expects Friday’s GDP data to show the UK returned to growth in the first quarter, ending last year’s short-lived recession. But a 12% cut in the energy price cap will probably drag inflation back below the bank’s 2% target this month – at least temporarily.

“The former suggests interest rates are just fine where they are, the second that rates could do with a trim.

“The result is a natural inclination to sit on the fence a little longer, especially since cutting too early risks sinking sterling and kick starting another bout of inflation.

“Leave interest rate cuts too late though, and the Bank risks accidently cratering the economy in its eagerness to get inflation under control. The MPC’s two dissenters clearly think that risk is growing.”