Economy Downturn the Greater Foe
It’s official. The Bank of England and those with control over the purse strings are more concerned about the global economic slowdown than rising inflation.
Earlier this week the Bank of England reduced the interest base rate by 0.25 per cent, from 5.25 to 5 per cent.
This is the third rate reduction in a row, and it is a clear message to the market that central bankers are more concerned about the economic slowdown than increasing inflation.
The central bank expects economic growth in Britain to be around 1.5 to 1.75 per cent, but given the brakes that are currently influencing the economy many commentators believe the bank’s growth estimate is optimistic and a recession is unavoidable.
The central bank believes that a weak economy will put breaks on inflation, and the reduction in interest rates will not contribute to inflationary pressure.
“Even if commodity prices remain at their current high levels, inflation should fall back,” a statement released by the bank stated.
“But to ensure that inflation meets the 2% target in the medium term, the Committee needs to balance two risks.”
Only time will tell if the balance will pay off.
The current environment of record commodity prices and rising inflation (2.5 per cent), with a rapidly cooling economy and tight credit markets is putting up new challenges for economists.
How they deal with these market conditions could re-write the rule book on economic management.
The US is already looking at inventive ways to calm the market, and bring balance back to the economy.
