The Bank of England may have announced the biggest rise in interest rates in 27 years but, at 1.75 per cent, they remain extraordinarily low by historical standards. The Monetary Policy Committee could hardly have sat on its hands. Having failed to foresee the scale and the longevity of this inflationary nightmare, it is now playing catch-up to limit the damage – not least to its own credibility. Inflation is expected to reach 13 per cent and the UK is heading for a lengthy recession. The rapid worsening of the Bank’s forecasts has given its critics further cause to question whether, blinded by groupthink and complacency, it has blundered badly.
Higher rates are not a problem in themselves. They may be a shock for a younger generation that has grown up with very loose monetary policy as the norm, and there will be inevitable losers – including those on tracker mortgages. But many people stand to gain from a return to more normal policy, and not just savers. Ultra-low interest rates have distorted the economy, fuelling extreme house price growth and propping up unproductive “zombie” firms that have only survived thanks to the very low cost of credit.
In the short term, however, the financial situation facing many households will be little short of disastrous. Wage increases cannot possibly keep up with rising prices, not least for energy. Global economic turmoil shows little sign of abating, with worries now about a shipping crunch on the Rhine. The war in Ukraine grinds on, while tensions are rising between China and Taiwan. It is possible that even the Bank’s latest forecasts could underestimate the misery to come.
The state of the economy and the pressure facing households have inevitably been at the centre of the Conservative leadership race. Liz Truss has pledged to reverse the National Insurance rise and cut green levies, both of which will provide some relief. She has also said she would review the Bank of England’s mandate, to the consternation of establishment experts who apparently consider it to be a model of technocratic excellence.
However, the outlook is so grim that far more radical and far-reaching reforms are likely to prove necessary. At present, after 12 years of Conservative-led governments, the economic record of the party has been distinctly underwhelming. Now it must be honest about the enormity of the challenge ahead and the consequences of persisting with a failed status quo.