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Can the Bank of England Prove It's Serious About Inflation?

A top economist says the Bank of England should hint at raising interest rates in the future to show it really wants to fight inflation.

By Piggy PressSep 17, 20262 min read 2 new words

In simple terms

Inflation affects everyone's wallet. If people believe the Bank of England is serious about controlling it, that confidence can actually help bring inflation down. If not, prices could keep rising faster, making everything from groceries to rent more expensive.

The Bank of England faces a tough choice about whether to raise interest rates right now. Interest rates are what banks charge to lend money—when they go up, borrowing becomes more expensive for everyone, which can help slow down inflation (the rising cost of everyday goods and services).

According to Bank of America economist Sonali Punhani, the Bank of England doesn't have to raise rates immediately to send a strong message. Instead, simply saying they might raise rates later could convince people that they're genuinely committed to fighting inflation. Punhani warns that if the Bank of England appears to have given up on raising rates entirely, people may stop trusting that the bank is serious about controlling inflation—which could actually make the inflation problem worse.

Fun fact

A central bank's credibility—whether people believe it will do what it says—can be just as powerful as actually raising rates. Sometimes just the threat of action is enough to influence how much people spend and save.

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Source: Bloomberg Markets