Inflation and interest rates

Meeting: 
MQT on 2014-10-22
Session date: 
October 22, 2014
Reference: 
2014/3987
Question By: 
Fiona Twycross
Organisation: 
Labour Group
Asked Of: 
The Mayor
Category: 

Question

The August edition of 'London's Economy Today', produced by GLA Economics, highlighted that "without a rise in the interest rate, CPI inflation is forecast to be above 2 per cent for most of the forecast period according to the Bank's (Bank of England) central projection". What do you perceive to be the implications for London's economy of CPI inflation returning to, and settling at, a position above the Bank of England's 2 per cent target over the medium term? Conversely, what do you foresee as the implications of an increase in interest rates?

Answer

Answer for Inflation and interest rates

Answer for Inflation and interest rates

Answered By: 
The Mayor

As you know, the Bank of England uses interest rates as a mechanism to target inflation. Inflation much above 2 percent will undermine savings and real wages; inflation or deflation much below 2 percent will inhibit spending and economic growth. The Bank therefore sets interest rates with this in mind and I am assured that any rises in this will be gradual.