Photo by Etienne Martin on Unsplash
The Bank of England has kept the bank rate steady at the current 5.25 per cent. The committee has recognised that the rate of inflation has been falling faster than expected compared to their November 2023 report.
According to a report by the MPC on the 1st of February, “...monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.”
They have further recognised that the labour market has eased up; however, it still remains “historically tight.” As demand lowers, and supply gradually increases there is bound to be “economic slack” i.e. resources which remain un-utilised leading to pressure on the job market.
The committee is still skeptical of cutting rates as they wish to see more concrete developments and cutting rates prematurely may lead to unwanted outcomes. Another problem the UK faces is the ongoing situation in the Middle East and Red Sea, and the Bank is likely to make substantial changes after the conflict has either subsided or mellowed.
The US, EU and India have also announced similar measures
On the 31st of January, Jerome Powell, the chair of the Federal Reserve, said “The lower inflation readings over the second half of last year are well, but we will need to see continuing evidence to build confidence that inflation is moving down, sustainably, toward our goal.” The US stated that it would maintain its current bank rate of 5.4 percent, a two-decade high, despite inflation falling faster than expected.
The European Central Bank has also announced a 4 percent rate, which is a record high, as they plan on fighting inflation aggressively. However, with France and Germany, two of the largest economies in the region showing lower inflation, there is a hope of a rate cut as early as April, however, many still believe that there is no such possibility till at least June.
While speaking with Bloomberg, Shaktikanta Das, RBI Governor, said “The topic of rate cuts is not even under discussion.” Delhi is unlikely to announce any rate cuts until the inflation rate falls under the target of 4 percent, the current bank rate and repo rate stand at 5.15 and 6.5 percent respectively and rate cuts are doubtful until Q4 of 2024
As headline inflation and core inflation continues to fall, and the labour market relaxes, it remains to be seen how long do these major economies keep their fiscal policies tight.
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