Bank of ENgland hold rates at historic lows, shock market!

Head of the Bank of England, Bailey today cut a dovish tone in the last meeting of the year.  He surprised the market by not hiking rates from the historically low 0.1%, the pound tumbled some 1.38% versus the USD as the market and traders were surprised by their lack of movement in the face of high persistent inflation.  

It seemed that the worry about the solidity of the economic recovery has trumped the concerns of inflation running far over the Bank’s target of 2%.  This will do nothing to tamper the hot housing market and will ensure demand, access to low credit, and short supply remain the normal for the near future. 

The danger in what the Bank of England are doing is that with wages also increasing in both public and private sectors we maybe in a situation akin the 1970s where wage growth allows producers to increase costs further increasing inflation, and putting more pressure on wages.  This cycle would ultimately be disastrous for the UK housing market and economy in general, as rates will eventually have to rise well beyond their long term averages to break the cycle.  Bailey is certainly playing with fire by ignoring the threat of inflation, and a possible over heating of the UK economy.