For 25 years, the Bank of England has never needed to raise interest rates by more than 0.25 per cent at a time. Yet we have entered a new era of volatility.
Britain’s inflation is running red-hot, predicted to hit 11 per cent in October. It is meant to be 2 per cent. We are on course to experience the worst inflation peak of any developed world economy this year except Russia.
The speed of this current surge in inflation has alarmed Bank officials as well as Britain’s political leaders.
The argument for baby steps grows weaker by the day. The US Fed threw caution to the prevailing winds yesterday, raising interest rates by 0.75 per cent, its biggest hike in three decades. In Britain, with every delay, inflationary pressures grow, making the problem harder to fix. The hawks are circling.
The problem that Bank of England chiefs (and the rest of us) face is that the UK’s economy is not strong enough to cope with a shock to interest rates. More radical action risks tipping the country into a recession.
Britain’s feeble recovery after the pandemic has stuttered to a standstill. Worker shortages and supply chain disruption are damaging economic growth and driving inflation, as demand outstrips supply. (Don’t mention the B word.)
Russia’s war in Ukraine is an external pressure beyond our control, although the lack of a robust national energy strategy is biting hard. No 10 is betting the house on energy prices coming back down.
Bank of England Governor Andrew Bailey is trying to walk an impossible path between subduing inflation and not crashing the economy. He can only dampen prices by forcing a sudden slowdown. That means hits to mortgages and other lending, to consumer spending, to business investment, jobs and renters.
None of us wants that, but one certainty about yesterday’s Bank of England rate hike is that they will soon need to come back for more.