The Monetary Policy Committee (MPC) has finally started to put right the issues caused by the double-dip recession of 2007/11. They controlled the interest rates to help move inflation towards their target of 2.0% whilst also looking to see Real GDP growth to help escape the turmoil of the recession.
Changes to the interest rate
• Between August 2004 and July 2007, there were 7 changes to the interest rate, growing from 4.75% to 5.75%
• Between July 2007 and December 2008, there were 6 changes to the interest rate, dropping from 5.75% to 2.0%
• Between December 2008 and March 2009, there were 3 changes to the interest rate, dropping from 2.0% to 0.5%.
The MPC has had a huge amount to deal with since 2004, but how successfully has it coped with the turbulences of the past 11 years?
With the MPC happy to accept inflation to within 1% of the target and so with that target being met on all but three years since 2004 (2008, 2010 and 2011), it does seem as though the MPC were successful at controlling inflation. With it taking 18 months for a change of the interest rate to take an effect on CPI, the MPC’s predictions were by-in-large fairly accurate. There has been no amendment to the interest rate since September 2009 which has helped investment and consumer spending, although may now be having a negative effect thanks to large numbers of consumer borrowers unable to pay their debts.
Over the past 10 years, the MPC have had a tough job to do thanks to the Great Recession of 2007-9 with further issues in 2011/12. Therefore, the decisions made have had to focus on saving (and later kick-starting) the economy to avoid at least some of the damage that a recession of this scale could (and eventually did) cause. With interest rates having dropped all the way down to 0.5% by 2009, when the second “batch” of economic hardship arrived in 2011, the MPC was forced to sit back and wait as an increase in the interest rate then could have had devastating consequences for both consumer spending and investment.
Although since 2009, the low interest rate has helped drop CPI back to a safe level (0.5% compared to 5.2% in September 2011), one concern recently has been the large amount of unpayable debt by both consumers and firms who have been attracted by the low interest repayments on loans. This time last year, it looked like the MPC were preparing to raise the interest rate up to 1%, however, recent issues with the price of crude oil may have delayed this announcement for the foreseeable future.
Earlier this month, the price of a barrel of crude oil dropped to $50, more than half of what it was at the same time last year. This has had a direct effect on inflation (along with issues in the Eurozone) which explains why the Bank of England are delaying their expected plan to raise interest rates.
Looking beyond to the future, the MPC, along with other EU countries are carrying out a policy of quantitative easing (the creation of electronic money to buy financial assets) to help raise inflation closer to the target of 2%. As for oil prices, I would expect them to begin to rise in the near future, although it may be unlikely that they will reach the same level as 2013. Interest rates should also rise soon, although we may have to wait until later in the year.
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