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Uncertainty over Environmental Policy to Increase Volatility of Inflation, says Bank of England Rate-Setter

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Bank of England interest rate-setter, Megan Greene, has warned that uncertainty surrounding environmental policy is likely to increase the volatility of inflation in the UK. Her remarks come in the wake of Prime Minister Rishi Sunak’s decision to delay key net zero pledges, including the ban on the sale of new petrol cars.

Speaking at a panel discussing the economics of climate change, Greene acknowledged that inflation is expected to be less stable and more unpredictable in the coming years. Traditionally, the UK has experienced low and stable inflation. However, Greene believes that ongoing uncertainty regarding environmental policies could disrupt this trend.

Greene clarified that central banks, such as the Bank of England, are not responsible for setting policy. Despite this, the lack of clarity from all actors in the economy regarding future policies may contribute to increased inflation volatility. She explained, “So I agree there probably will be volatility around our 2% target.”

The Bank of England’s target inflation rate is 2%, and any deviation from this level can have significant economic implications. The central bank uses interest rates as a tool to manage inflation and stabilize the economy. If inflation exceeds the target, the Bank may raise interest rates to reduce spending and curb price increases. Conversely, if inflation remains below the target, interest rates can be lowered to stimulate spending and boost economic growth.

Greene’s comments highlight the potential impact of policy uncertainty on the Bank’s ability to achieve its inflation target. With the government’s recent decision to postpone key net zero pledges, concerns have arisen about the long-term direction of environmental policy. This uncertainty can create challenges for businesses and consumers in planning and decision-making.

The UK is committed to achieving net zero carbon emissions by 2050, and this target has significant implications for various sectors, including transportation and energy. The delay in banning the sale of new petrol cars has raised questions about the government’s commitment to this goal and its overall environmental agenda.

The Bank of England plays a crucial role in managing the economy and ensuring stable prices. As such, it closely monitors inflation and adjusts interest rates accordingly. However, the ability to make informed decisions is hindered by policy uncertainty. Businesses and individuals rely on clear and consistent policies to make investment and spending decisions. Without such clarity, fluctuations in inflation rates can disrupt economic stability.

Greene’s remarks serve as a reminder of the potential consequences of policy uncertainty on inflation. The Bank of England will need to closely monitor the situation and adapt its monetary policy accordingly. Achieving the inflation target of 2% may prove challenging if volatility persists due to ongoing uncertainty surrounding environmental policies. Clarity and consistency from policymakers are crucial in maintaining stability and fostering economic growth in the UK.

More detail via Reuters here… ( Image via Reuters )

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