Azara Blog: UK interest rates are allegedly too low

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Date published: 2007/06/27

The BBC says:

UK interest rates are too low and are helping to drive demand for loans and credit, Sir John Gieve, deputy governor of the Bank of England, has said.

Speaking in Guildford, Surrey, Sir John explained why he was one of four rate setters who voted to raise interest rates at the Bank's last meeting.

Rates are at 5.5%, their highest in six years as inflation has quickened.

However, business leaders warned that consumers were already feeling the pinch as retail sales growth slowed.
Sir John noted that there was a risk that "we may increase interest rates too fast or push them up too far, with an unnecessary loss of growth".

However, he also warned that "we may raise rates too slowly with a cost in higher inflation and potentially higher interest rates and a sharper slowdown in the end".

In some ways this is just trivial commentary from Gieve. On the other hand, the Bank of England did lower interest rates too much a couple of years ago, and so it is partly their fault that the current situation exists. And interest rates are a blunt instrument, taking a year or more to feed through the system. It's quite possible that they will "increase interest rates too fast", given their track record. Unfortunately the people who decide interest rates face no consequences for poor decision making.

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