Lower pound should not prevent future rate cuts

Today’s decision to leave interest rates unchanged presumably reflected a belief amongst MPC members that the drop in the exchange rate will do their job for them. This view is supported by some model-based estimates of the impact of exchange rate movements. The Treasury’s old four-forone rule, for example, suggests that the drop in the pound is the equivalent of a 1.5% cut in interest rates, while the Bank’s model estimates that it will add 0.5% to 1.0% to inflation.