With Thursday’s 0.5 percentage point increase in interest rates to 5%, the Bank of England is hoping to land a knockout blow against inflation.
The latest hike is an admission that 12 rises over more than 18 months have not been enough to tackle the problem. Or, as the minutes said, the impact of shocks from Covid and the energy price crisis “were likely to take longer to unwind than they had done to emerge”, adding that the risks of inflation remaining high “were skewed to the upside”.
A 13th rise, and a big one at that, was needed to calm spending in the economy and reduce an inflation rate that remained stubbornly high at 8.7% in May, more than four times the 2% set by parliament as the central bank’s target. That was the view of seven MPC members. Two others said the Bank had caused enough pain and voted for a pause, to keep interest rates at 4.5%.
Will rates go higher? There were no clear signals. In the minutes of its latest meeting, buried at point 47, the monetary policy committee (MPC) said only: “If there was evidence of persistent pressures, then further tightening in monetary policy would be required.”
The financial markets expect the Bank will continue raising, to as high as 6% before the job is done and inflation slayed.
These extraordinary costs of borrowing – extraordinary at least for those under the age of 40 – look like hanging around for some time to come. Politically, that is likely to prove disastrous for the prime minister.
Rishi Sunak may feel confident that his pledge to oversee the halving of inflation by the end of the year is safe – he made the commitment during his first months as prime minister and doubled down on it on Thursday.
It is likely businesses will appreciate inflation falling and the return of some stability after what has been a crazy and destabilising period marked by a succession of faction-ridden Tory administrations.
But families in crucial home counties constituencies are unlikely to be so forgiving. Those who need to re-finance their mortgage loans over the next 18 months face rocketing monthly bills amounting in many cases to an average £3,000 extra a year and double that in outer London boroughs.
Sunak is not the only one with a problem that won’t go away. The Bank of England governor, Andrew Bailey, has suffered withering criticism for believing the economy would react to the end of the Covid-19 pandemic and falling living standards much as it did after the 2008 financial crash.
The post-crash recovery was marked by a rise in oil prices that proved transitory. The word transitory was used again at the beginning of the current inflationary cycle, but no one – not consumers or businesses – has behaved in the same way as they did in the years after 2008.
The differences are many and, in the opinion of an increasing number of MPs, need a central bank that pays less attention to economic models and more to what is happening on the ground.
It is reasonable to ask how the Bank underestimated the impact of Brexit on the numbers of skilled workers available, causing shortages in key industrial sectors. Or whether it failed to recognise the impact of a hollowed out health service and its inability to get workers affected by Covid back on their feet.
It was the French social and political analyst Alexis de Tocqueville who said: “When the past no longer illuminates the future, the spirit walks in darkness.”
All central banks find themselves in this situation, but Bailey is struggling to explain why the UK is suffering more than most.
