Interest rates now depend on Election

Nia Williams

April 9, 2010

Commenting, he said: “Despite the next Quarterly Inflation Report being due a mere 2 days after the May Bank Rate decision, which has been delayed to Monday 10 May because of the general election, a rather more important influence next month will be the result of the General Election, and in particular whether there is a hung parliament.

“Should the election be close the result may not be obvious when the MPC starts its two day meeting on the day after the election. In view of the significant difference in the fiscal policies of the two main parties, and the impact these are likely to have on the markets, the future trend of bank rate is very entwined with the political future of the UK. Therefore any lack of clarity on the make up of the new parliament would make early discussions at the MPC meeting somewhat problematical.

“Looking further ahead the MPC will clearly want to see more information quickly from the new government on its fiscal plans as monetary policy is clearly influenced by fiscal policy. For example, the Conservatives have said that if they form the new Government there will be a budget within 50 days. They have also said they want to see interest rates remain low for some time.

“In the unlikely event of a hung parliament the situation becomes more difficult as this will significantly increase the risk of the UK losing its AAA credit rating. Despite the credit rating agencies demonstrating their incompetence in the run up to the credit crunch, what they say still has a surprisingly large amount of influence and so, whatever one’s views of the agencies, what they say can not be ignored.”

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