ALEX BRUMMER: A hammer blow for households — and it won’t even work
There is deep concern across Britain about the impact the Omicron variant will have on business and the economy.
So the Bank of England’s shock decision yesterday to go it alone and raise interest rates is truly baffling.
My fear is that it will prove a hammer blow to prosperity. During emergencies, as we saw at the start of the Covid crisis last year, it is the job of the Government and the Bank to do all in their power to prevent scarring to the economy, jobs and households.
But the Bank has done just the opposite of that. History shows how raising rates unexpectedly and unilaterally can backfire in the most devastating fashion.
Andrew Bailey is the Governor of the Bank of England and Chair of the Monetary Policy Committee, Financial Policy Committee and the Prudential Regulation Authority
During the financial crisis in 2008, the European Central Bank chose to raise rates – ostensibly to avert a cost-of-living crisis across the EU – without consulting America’s Federal Reserve or other major players.
That decision led to a devastating slump in the Eurozone and established a legacy of unemployment that has bedevilled some EU countries ever since.
Admittedly, the Bank of England’s new rate rise comes from the lowest level in more than 300 years.
As my colleague Ruth Sunderland writes below, the vast majority of homeowners are on fixed-rate deals and it is unlikely to have an immediate deleterious effect on the cost of mortgages. But interest rates are a sledgehammer, not a scalpel.
Hiking them will do nothing to end the destructive volatility in global energy costs or the supply bottlenecks around the world – which led to higher prices – that are being caused by the unwinding of Covid restrictions.
Next year, inflation is already set to leap to 6 per cent – triple the Bank’s target rate.
More than doubling the Bank rate will do nothing to control petrol prices, which are now up 29 per cent year-on-year, electricity prices (almost 19 per cent higher) and natural gas, up 25 per cent.
Inflation certainly will have to be tackled in the spring if it is not to poison the economy. But this was the wrong action at the wrong time.
RUTH SUNDERLAND: A hike to exorcise the demon of inflation… if only it had come sooner
Calm down, everyone! No one ever wants to see interest rates go up, but Governor Bailey has done the right thing.
Many were amazed by yesterday’s decision, but in my view he should have acted earlier.
Any more failure to tackle the growing inflation problem would have amounted to a dereliction of duty.
For the past 30 years, the Bank has made controlling inflation its core mission because of the appalling social and economic harm that it creates.
If Bailey had not raised rates, he would have thrown his credibility and the Bank’s to the dogs. Those who are arguing so volubly against a very modest rise need to get a grip.
They seem to have forgotten that the Bank slashed rates in two emergency cuts when the virus struck in March last year, taking them to near zero.
Rates have now risen to just 0.25 per cent, which is not only still extremely low by historic standards, but also significantly below the 0.75 per cent base rate that stood immediately before the pandemic.
When I bought my first property in the 1990s, I would have given my right arm for rates like this. It’s worth remembering that around three quarters of borrowers have fixed-rate home loans, so will suffer no immediate pain.
The Daily Mail’s Alex Brummer points out correctly the Bank has no control over some elements of inflation, such as energy bills.
But by raising rates, Threadneedle Street has sent a clear message that it takes inflation seriously. A small increase is a price worth paying to exorcise that demon.
The hope now is that a modest hike will avoid the need for more painful ones in the future.
And, of course, it is not irrevocable. If inflation does turn out to be only temporary – or the economy weaker than thought – it can always be reversed. So let’s get some perspective.