Interest rate hike will damage economy while doing little to fight inflation

The New Economics Foundation (NEF) has reacted to the Bank of England’s decision to raise interest rates to 4%.

Theo Harris, economist at NEF, said:

“Raising interest rates risks damaging the economy while doing little to fight the inflation we face, which is driven by international fossil-fuel prices. This act of economic self-harm is the result of inflation management having been entirely outsourced to the Bank of England, with the interest rate as its only tool. It should be a top priority for the government to move towards better coordination of monetary and fiscal policy with the Bank, otherwise the prime minister will find that his ambitions are continually undermined by unnecessarily high borrowing costs.

A perfect example of this was the recent budget, where the chancellor should have done more to lower prices and missed a trick when designing his energy bill support package. Had he lowered the price of energy bills directly, alongside other essentials like rent and public transport, he could have lowered the inflation rate – reducing pressure on the Bank to raise rates.”

Notes

The New Economics Foundation is a charitable think tank. We are independent of political parties and committed to being transparent about how we are funded.