economonkey

This report from the BBC highlights the Bank of England’s current predicament over interest rates. If rates are cut further, then inflation in the UK is likely to run even further out of control, but with economic growth slowing and the housing market looking increasingly shaky, a cut in rates is precisely what a lot of people are screaming for.

In theory it’s the job of the Bank’s Monetary Policy Committee (MPC) to keep inflation under control when it sets interest rates. But the truth is that any pretence that the Bank is at all independent from the government has long been abandoned – we all know the truth, the Bank does not really control interest rates, it simply does whatever it’s masters at Westminster want to further their own political agendas.

The Bank may want to keep inflation under control, even if that means some bad tasting medicine in the form of a rocky stock-market and falling house prices, but the chancellor and prime-minister would much rather have completely the opposite. Inflation is a big problem for society, it means the money in your pocket is worth less because everything costs more. But inflation is less of a problem for politicians trying to score a high feel-good-factor with the voting public, it’s easy to fudge the inflation figures by practicing a little economics voodoo with the methods used to measure it.

Don’t believe me? Ask yourself this – how has inflation managed to stay so stable for so long when house prices have been shooting upwards at an incredible rate for over a decade? Simple, the government came up with some half-baked excuse to remove houses from the inflation calculations so that they don’t affect the overall figures any more. This kind of thing goes on all the time, so much that the government’s official inflation figures are practically meaningless because they’ve been heavily manipulated for political motives.

Most people only have a vague understanding of how inflation works and how it affects their finances, and while they might grumble occasionally about rising prices they’re unlikely to see a direct link to government policy – they’re much more likely to blame greedy corporations. On the other hand, it’s not very easy for the government to massage house prices or the stock market’s performance, and since these economic indicators are much more visible and easy to understand by the man in the street, politicians would much rather keep them booming for as long as possible.

The upshot of this is that we currently appear to have a flagging economy and a Prime Minister who’s fighting a losing battle to stay in control. So even if the Bank of England claims that it’s on a mission to fight inflation, don’t be at all surprised if interest rates get slashed again and again this year – because that’s exactly what the government will be demanding.