Post-election Economics 8 Dec 2019
Bank of England: there is potential for a significant surprise and post-election economic rally if the Tories gain a strong workable majority. This is due to changes they could make to how the Bank of England is run and what its remit is. Currently the bank’s only objective is to achieve an inflation target of 2%. The bank has been relatively successful in controlling prices which enables individual’s & business to plan for future price & wage rises.
In the US, the Federal Reserve, the US central bank, has a much wider remit; rather than just focussing on inflation which can be somewhat arbitrary (for instance train fares always seem to rise, while computer prices have fallen dramatically, so the two per cent affects different people in different ways), the Federal Reserve has a much wider remit which is to support economic growth more generally. So for example, it could cut interest rates and allow inflation to be much higher than 2%. Something the Bank of England can not do.
If this policy was adopted it is likely to lead to stronger economic growth over the next couple of parliaments as overall economic policy will be looser, ie lower short term interest rates and higher spending for a longer period. This may ultimately lead to slightly higher real interest rates of 2-2.5% but that is some way off.