The sharp drop in UK headline inflation from 2.8% to 2.4% should come as welcome relief to the Bank of England. But it still bodes ill for the UK economic outlook. The UK’s slowing rate of inflation, low wage growth and the tepid pace of recovery are all clear signs that UK economic policy is still far too tight. The Bank of England may be doing their level best to prop up the economy with ultra loose monetary policy, but the government’s extremely tight fiscal policy is still wreaking huge damage on growth prospects. Unless the government changes direction quickly, it risks condemning the economy to bouncing along the bottom of sub-par growth for years.
The message for monetary policy is that the Bank of England must continue to bear the brunt of anti-austerity stimulus for a long while. With inflation coming down, wage growth so low and unemployment remaining relatively high, there is little risk of the Bank’s monetary measures spilling over into economic overheating. There is little chance of UK rates going back up for some time to come, possibly not until 2015.
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