2023-05-08 23:00:00 ET
Summary
- Real rates in the UK are 200bps below core inflation.
- From the perspective of headline inflation, things are much worse.
- Overall, UK inflation is running at 10.1%; that’s nearly 6% above the Bank of England’s policy rate.
By Erik Norland
At A Glance
- Real rates in the UK are 200 basis points below core inflation
- Inflation in the UK is running at 10.1%; that’s nearly 6% above the Bank of England’s policy rate
A key question at the center of the Bank of England’s monetary policy debate remains. Can the central bank control inflation with negative real rates?
During the 1970s, central banks often set their policy rates below the rate of inflation, hoping that inflation will just go away by itself without them having to take drastic action. The problem is that hope isn’t a strategy and keeping policy rates below the rate of inflation didn’t work. Inflation spiraled higher until central banks put interest rates in positive territory in 1980.
The Bank of England currently has its policy rate at 4.25%. However, core inflation is running at 6.2%. That means that real rates in the UK are 200bps below core inflation.
From the perspective of headline inflation, things are much worse. Overall, UK inflation is running at 10.1%; that’s nearly 6% above the Bank of England’s policy rate.
The problem is two-fold: if the Bank of England keeps rates below inflation, inflation could spiral higher. On the other hand, if they raise rates above inflation, that could mean at least 200bps more rate hikes. That could create severe financial distress in an economy where most mortgages are floating rates and where debt levels have risen in recent decades.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Can Central Banks Control Inflation With Negative Real Rates?