On June 15, the Monetary Policy Committee of the Bank of England decided once again to keep interest rates at the record low of 0.25%. However, the big news is that the unexpected 5-3 vote on that decision signals a change of a monetary policy, amid rising inflation that threatens households’ real income. This was no surprise as inflation in the UK economy reached 2.9% in May, keeping up its accelerated trend. In fact, this rate has surpassed the target rate of 2% set by the BoE, quicker than expected. Still, action against this through tightening of the monetary policy is considered cautious as the UK economy has not managed to sustain strong growth rates.
However, the driver of such inflation which is the depreciation of the pound against other currencies cannot be controlled without an interest rate hike. In fact, rising inflation would eventually lead to the deceleration of consumption as the real income of consumers will be eroded by a weaker pound that increases the price of imported goods. This is already evident somewhat as the growth volume of sales in retail has been decelerating since the beginning of the year. As a matter of fact, the stimulation of supply through increased lending seems meaningless as consumers’ confidence is low.
Furthermore, as much as the real income of consumers is diluted, a relaxed monetary policy can only be a placebo for inducing consumption. Such a policy would only lead to economic growth that is built on debt, risking a financial crisis, especially now that uncertainty prevails.
Finally, the side effects from the tightening of monetary policy, such as the increase of mortgage and investment-lending costs must be approached from another perspective. In fact, the consequences of Brexit do not prescribe a relaxed monetary policy as when the time comes for a stimulus; it will not be feasible as interest rates will already be low.