Mather and Murray’s Samuel Mather-Holgate comments on Bank of England interest rates

Since the near melt down of the financial crisis of 2008 global interest rates have been at rock bottom. There was a concerted effort to pump more money into the economy at a time of crisis that, arguably, saved the bank industry as we still know it.

However, for 15 years since we have seen regular, stable growth across most developed economies. During this time we have seen inflation bump along at or near it’s target rate, although at times touching near 4.0%. Whilst we all know hindsight is 20/20 vision, it doesn’t take a clairvoyant to predict that we may have another financial emergency in the future and we need an arsenal of weapons to react with.

During this period of relative stability, the central bank should have been very slowly and gradually increasing rates to a near normal level. Instead, it hunkered down with ultra low rates and purchased near one trillion pounds worth of bonds through quantitative easing; a policy that it seems unable or unwilling to unwind despite it being an attractive tool in the fight against inflation. 

Considering the Bank has not admitted to any mistakes or contributory actions that have made inflation take off and keep hold, it is unlikely they are best placed to deal with the current economic situation and be forward looking enough to see what is coming down the tracks. I am pleased that rates are where they are, but not with the route the bank took to get them there.

The question, now, is what next? We all know that a recession is on its way. Despite revised forecasts from the Bank, that you must take with a handful of salt, they say that we will go through a recession lasting over a year and unemployment is set to rise significantly. We also know that the sharp spike in energy costs will have been in the system for a year from May and have actually fallen over the last several weeks. This means inflation will fall in the Spring and could even reach central bank target in the summer. 

Considering these facts and the huge pressure on households and businesses, it seems ludicrous that Andrew Bailey is talking about further rate rises and a terminal rate of 4.5%. Two of the monetary policy committee members have already seen sense and voted against the last interest rate hike. After all, they do have quantitative tightening if they want to keep downward pressure on inflation without penalising the general public. 

Under normal circumstances rate rises would impact inflation, but when price rises are imported from aboard on essential utilities, raising rates doesn’t control prices. Demand is already weak and not an upward contributor to prices.

The only thing the bank of England are doing is causing pain to homeowners who have seen their mortgage bills sky rocket, forcing rents up as landlords see their finance costs go up, ensuring businesses make redundancies as commercial loans increase and demand weakens. It’s a sadistic policy that will see unemployment climb, homelessness rise and the economy crippled. There is another way, they should pivot sooner, rather than reacting to another crisis they have caused.