The most recent growth figures surprised many people and this led to sterling rising and speculation about whether a decision to raise interest rates would be made at this week’s MPC meeting. So, what are the prospects for inflation and interest rates?
It is possible to have a rise in growth without any implications for inflation. Dramatic improvements to the supply side of the economy could raise our growth rate significantly. Despite the Prime Minister’s recent speech on growth to the CBI, those improvements to the supply side are not likely to happen any time soon. David Cameron did not focus on reducing the regulatory and tax burdens on business but on how government could spend more and on how bureaucrats could help business more. He is barking up the wrong tree.
Indeed, recent announcements do not bode well for supply-side led growth. The full rate of the minimum wage has been extended to younger people; we have the EU maternity leave directive; new EU regulations on investment markets; the imposition of a new Equality Act; and a pledge by the Chancellor to extract the “maximum sustainable tax revenues” from the financial services industry. All this happened in three weeks.
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