UK inflation hits 10-year high at 5.1% as cost-of-living compression tightens – business live | Business
As for the MPC’s upcoming decision, the model “recommends” a key rate of 0.2% – in other words, a slight increase from the current rate of 0.1%. Without the built-in disease tracker, the model would instead call for a 0.5% rate, so it shows how much growth fears weigh on its advice. Of course, if market expectations are correct and the MPC leaves rates unchanged, we will conclude that these fears weighed them down even more.
The danger of such an approach is that growth fears are potentially overblown at this time. There is evidence that the UK economy has been successful in adjusting to past COVID restrictions. And the latest annual inflation reading of 5.1% will make it more likely that inflation two years from now will be higher than the current forecast of 2.2% – putting further pressure on the MPC to act.
Then again, with the speed at which the omicron moves through the population, the infectious disease tracker could very soon return to 2020 levels. If that happened, the model would recommend that interest rates stay at 0.1. %. All of this serves to highlight why it is very difficult for the MPC to make a decision and why, especially in times of a pandemic, it is helpful to refer to the monetary rule for guidance.