Despite the Bank of England’s claim that Bank Rate controls inflation, recent policy decisions — including cutting rates while inflation stayed high — suggest the relationship is weak, inflation is more persistent than expected, and the MPC may be underestimating how hard it is to bring prices down, says Paul Ormerod

The Bank of England proclaims on its website that: “We set monetary policy to achieve low and stable inflation. This is our primary monetary policy objective”.

As the Bank itself points out, the Monetary Policy Committee (MPC) believes the main tool to control inflation is Bank Rate, the interest rate the Bank pays on deposits placed with it overnight by commercial banks.

It goes on to note that in practice this means “keeping inflation at two per cent over the medium term”.

However, in the year to August inflation was measured at 3.8 per cent.

Curiously, despite inflation being almost double the target........

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