Bank of England Monetary Policy Committee member Swati Dhingra said on Monday that inflation in the UK was unlikely to rise sharply again and that the UK central bank should reduce borrowing costs.
Key quotes
Now is the time to start normalizing (interest rates) so that we can finally stop putting pressure on living standards in the way that we have been doing to try to reduce inflation.
I don’t see any kind of consumer boom and if we’re going to start moderating from the very high level of interest rates that we’re at now… it’s going to take some time for that to happen, for us to moderate it and for that to then be passed on to the real economy.
Demand is too weak for inflation to rise sharply.
Now is the time to start normalising interest rates so that we can finally stop putting pressure on living standards.
Market reaction
At the time of writing, GBP/USD is trading at 1.2965, losing 0.17% on the day.
BoE FAQs
The Bank of England (BoE) decides the monetary policy of the United Kingdom. Its main objective is to achieve price stability, i.e. a constant inflation rate of 2%. Its instrument for achieving this is the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and at which banks lend to each other, determining the level of interest rates in the wider economy. This also influences the value of the British Pound (GBP).
When inflation exceeds the Bank of England’s target, the Bank of England responds by raising interest rates, making it more expensive for citizens and businesses to access credit. This is positive for the British Pound, as higher interest rates make the UK a more attractive place for global investors to invest their money. When inflation falls below target, it is a sign that economic growth is slowing, and the Bank of England will consider lowering interest rates to make credit cheaper in the hope that businesses will borrow to invest in growth-generating projects, which is negative for the British Pound.
In extreme situations, the Bank of England may implement a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit into a jammed financial system. QE is a policy of last resort when lowering interest rates fails to achieve the required result. The process of QE involves the Bank of England printing money to buy assets, usually AAA-rated government or corporate bonds, from banks and other financial institutions. QE often results in a weakening of the British Pound.
Quantitative tightening (QT) is the reverse of QE, and is applied when the economy is strengthening and inflation is starting to rise. Whereas in QE the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage them to lend, in QT the BoE stops buying more bonds and stops reinvesting the maturing principal of bonds it already holds. This is generally positive for the British Pound.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
