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While many in political circles were surprised that Gordon Brown brought back his archenemy Peter Mandelson to the government there has been little in the way of controversy before today. However,...
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Wednesday 20th August 2008
The minutes from the Bank of England meeting last month show that there is a total lack of direction on the MPC. Seven voted to retain rates at the current level, one voted to increase and one voted to decrease rates leaving the investment world in a quandary. So which way will they finally lurch?
The problem we have now is the fact that the MPC is made up of experts with different views and different priorities, hence the split across the board. Some are looking longer term with the belief that a short term battle against inflation by retaining rates or increasing them will be more beneficial to the economy that reducing rates and encouraging increased spending from consumers.
The problem with reducing rates when inflation is high is the fact that the spending power of the pound in your pocket will diminish very quickly. This will mean high pay deals, increased prices in shops and an all round increase in the cost of living. Reducing rates from a lower level of inflation means that the pound in your pocket has more spending power in comparison and there is less chance of feeding the inflation monster, with pay deals likely to be lower and price increase less in comparison to a high inflation environment. |
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