Interest rates if we have inflation and recession

caper7

Interest rates go up to control inflation and down to stimulate a sluggish economy/recession if I understand correctly.
Currently inflation is not fully under control and large public sector pay rises are said to likely worsen the scenario, however there is also a lot of talk of poor sales and a possible looming recession. 
What happens if we have both at the same time?
The BOE is supposed to focus just on inflation but I personally don't believe they have done that at all for many years, I think they are politically wedded to low interest rates. 
So what happens to interest rates? Which issue is prioritised? 
Any thoughts appreciated. 

Bostonerimus1

Stop worrying about monetary policy.

Mark_d

If we knew what decisions the BOE would make we'd all be very rich!

In my view, we want to avoid recession but we can't let inflation get out of control.  I would consider a tiny reduction in interest rate within the next 3 months but I don't imagine we'll see a rate of less than 4.25% within the next 2-3 years.

masonic

It's worth remembering that the private sector is over 4x the size of the public sector, and is ahead of the public sector in recovering real terms earnings losses due to the previous inflation spike. In avoiding recession, you can't simultaneously stimulate economic activity and reduce consumer spending through earnings suppression. There is also the question of how much of these restorative pay increases will be used for discretionary spending that wouldn't have been made prior to the inflation spike. So the situation is quite complex.

The MPC's remit may be solely towards price stability, but it is a symmetric target, meaning they need to care equally about deflation that could result from a depression, so they would be empowered to cut rates in the event that economic activity needs to be stimulated.

At the moment, there seems to be some risk of stagflation, which is a challenge that cannot be met with interest rate policy alone.

While the stated target of inflation is 2%, it has been considered for a very long time that governments tend to be ok with a rate a little higher than that, due to the effect on the national debt. It also helps stimulate productive use of the money in circulation.

Reaper

masonic said:

The MPC's remit may be solely towards price stability, but it is a symmetric target, meaning they need to care equally about deflation that could result from a depression, so they would be empowered to cut rates in the event that economic activity needs to be stimulated.

At the moment, there seems to be some risk of stagflation, which is a challenge that cannot be met with interest rate policy alone.

The Bank of England is only meant to be concerned with inflation, unlike the US Fed which has dual targets of inflation and employment. So in theory in the case of stagflation they should raise rates, but in practice I am sure the government would be pressurising them not to deepen a recession.

masonic

Reaper said:

masonic said:

The MPC's remit may be solely towards price stability, but it is a symmetric target, meaning they need to care equally about deflation that could result from a depression, so they would be empowered to cut rates in the event that economic activity needs to be stimulated.

At the moment, there seems to be some risk of stagflation, which is a challenge that cannot be met with interest rate policy alone.

The Bank of England is only meant to be concerned with inflation, unlike the US Fed which has dual targets of inflation and employment. So in theory in the case of stagflation they should raise rates, but in practice I am sure the government would be pressurising them not to deepen a recession.

I think we've seen from the 1970s that a more hard-line approach is probably the better one for the long term, as painful as it may be in the short term, as long as you can avoid moving into a depression. If prices start falling, then the remit would be to cut interest rates to bring inflation back up to the 2% target, but by that time it is probably too late.

Albermarle

Currently inflation is not fully under control and large public sector pay rises are said to likely worsen the scenario,
Currently private sector pay inflation is a little higher than public sector. Maybe with the recent agreements to stop the strikes, it may reverse a little, but unlikely to be significant compared to all other factors.

however there is also a lot of talk of poor sales and a possible looming recession.
Depends on the source of the info. There might be a dip ( Xmas sales figures will be interesting) but with low unemployment and wages increasing more than inflation, house prices increasing, interest rates at normal levels, increased public spending etc a proper recession seems pretty unlikely. Hopefully not anyway.