Either way, serious inflationary pressures are now upon us. The Bank of England insists this situation is transitory and we should “look through” rising prices. So why raise ultra-low interest rates or rein in quantitative easing (QE), the extraordinary ongoing expansion of our central bank’s balance sheet?
That view is convenient – telling politicians and financial markets what they want to hear.
Well yes. The thing is though, it’s a standard assumption that monetary policy takes about 18 months to work. So if you want to head off inflation you’re got to tighten monetary policy 18 months before the inflation arrives. Not, as will likely happen, 6 months after it does.
No, the MMT solution of higher taxes doesn’t work any faster. Especially given that we generally only raise tax rates for next year, not the current one.