Tough choices for the Bank as inflation rises

The Bank of England revealed today that it forecasts inflation to rise to 2.8%, well above its 2% target. The combination of rising prices, stagnating incomes and slowing employment growth is bad news for households, as they face a higher cost of living across the board.

Currently, the Bank’s policies of low interest rates and quantitative easing have the effect of pushing up inflation, with little benefit to jobs and household incomes.

What’s more, loose monetary policy also contributes to a build-up in household debt, as cheap borrowing costs encourage consumers to borrow more. Mark Carney recently warned that household borrowing has “accelerated notably”. The Bank considers excessive household debt as one of the biggest threats to our economy.

This situation puts the Bank in a tricky spot. It can’t tolerate above-target inflation and higher living costs indefinitely. But by raising rates, it would risk provoking a stock market crash. With many people already struggling with debt repayments, even a small rise could prove unaffordable.

The Bank of England needs a more sustainable approach, one where it can stimulate spending without piling more pressure on borrowers. Our letter to the Chancellor signed by leading economists outlines how it could be done.