COUNTING THE COST OF HIGHER BASE RATES

Abstract

It is a brave Chancellor of the Exchequer who raises interest rates when inflation is at record low levels and there are few signs of overheating. But Kenneth Clarke is clearly trying to give substance to his commitment ‐ made in June's Mansion House Speech ‐ to pursue stable monetary and fiscal policies. In that speech, the Chancellor told his City audience that the government had “not created the conditions for the strongest recovery in Europe in order to throw it away by creating yet another boom followed by bust”.There is widespread agreement with the Chancellor's objectives. But the difficult question for economic management is how high interest rates will need to go in order to contain inflation and keep the economy on course. In this Forecast Release, we examine this question as well as assessing the likely impact of the first rise in base rates for five years.