IoD: Parties’ spending plans ‘will need to be factored in’ to Bank’s rate-setting

Responding to the Bank of England’s decision to keep interest rates unchanged at 0.75%, Tej Parikh, Chief Economist at the Institute of Directors, said:

“With tax, spending, and Brexit policy all contingent on the election, anything other than a holding pattern on interest rates today would have raised eyebrows. With inflation below target for now, the Bank has additional backing for its wait-and-see strategy.

“While global headwinds and subdued growth at home may have tempted some toward a rate cut, the MPC is prudent to hold back headroom to cover off various potential Brexit scenarios.

“At the same time, the consensus across the political divide to loosen the Treasury’s purse strings changes the Bank’s calculus. Monetary policy has long been relied upon to provide stimulus, so while government investment in areas like infrastructure is generally welcomed by business, considerable additional spending will have inflationary effects down the line that will need to be factored in.”