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The Bank of England’s interest rate decision was released on Thursday. The Monetary Policy Committee (MPC) decided by seven votes to two to keep interest rates on hold at their current 5.25%

level, with the two voting to cut rates. The Bank indicated that interest rate cuts are near, but that it wants to see more decisive evidence inflation is falling to target before it moves.

This is a mistake and it is based on a flawed, reactive conception of how monetary policy decision should be made. When the Bank raises or cuts rates, that can have some modest impact on

inflation almost right away, if it affects the pound’s exchange rate and so makes imports cheaper or more expensive.

But most of the effect interest rate changes has takes quite a bit of time to come through – something like 18 months to three years. So in the main, interest rate changes now won’t be

making current inflation or inflation over the next few months lower. Where inflation goes over the next few months is the result of the Bank’s monetary policy decisions eighteen months and

more ago.

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But we already know, pretty well, what the likely effects are going to be of those Bank decisions from 18 months and more ago. The UK’s money supply shifted, a little over eighteen months

ago, from its previous position of growing very fast (far too fast in fact – which was the main reason inflation went so high) to growing only very slowly and then contracting. That

contraction in the money supply will have its main effects on inflation over the next few months and up to about eighteen months from now.

Those monetary signals indicate clearly that the Bank had done more than enough to get inflation back to target. Indeed, they suggest inflation is likely to drop below target and stay there

for some time. The Bank’s models make little to no use of such monetary signals, which is probably why inflation has come in well below the Bank’s forecasts for many months now (and also why

inflation came in well above the Bank’s forecasts in the period the money stock was growing rapidly).

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Waiting until inflation has actually fallen before cutting rates is waiting too long. It’s a bit like steering a supertanker. The ship’s momentum means that if you want to stabilise the

course after making a sharp turn, you need to start that stabilisation manoeuvre well before the ship has reached the intended heading. Otherwise, you will overshoot.

That’s the mistake the Bank is making here. It should be making its decisions on the basis of the future, not the past or where it thinks we are now. The work of getting inflation down is

already done. The focus now should be on cutting rates, avoiding inflation falling too far below target and getting the economy back growing again.

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