As the FT reports this morning:
The Bank of England is likely to keep interest rates steady this week even as it confronts the prospect of above-target inflation for the rest of 2026, as policymakers buy time to assess the risks stemming from the energy crunch.
As they also report, the Bank of Japan did just that yesterday:
The Bank of Japan has held its benchmark interest rate despite forecasting a sharp rise in inflation as the war in the Middle East clouds the global economic outlook and tests the country given its exposure to rising energy prices.
That report from Japan does come with a warning, though. Of the nine members of its monetary policy committee, three voted for an increase. We can expect a split of a similar sort in the Bank of England vote this coming Thursday, because the deficit hawks on that committee, who live their lives terrified by inflation, will have noted claims like this in the Daily Telegraph:
Retailers have warned consumers to brace for a wave of price rises in supermarkets.
All those central bankers who might vote for an increase in interest rates at this moment suffer from a very weird malady. I can only presume that it is their honest belief that somehow or other the consequences of war in the Middle East can be addressed by raising interest rates in countries that have, at present, no direct influence on the outcome of that war.
This belief makes no sense at all. It is evidence of economic derangement, and little else. The reason for increasing interest rates when inflation rises is to suppress what is presumed to be heightened domestic demand arising from economic overheating, driven by excess private-sector activity that pushes demand beyond the economy's capacity to supply what consumers wish to buy.
Nothing like that situation exists at present. Demand within our economy is already depressed. Consumer confidence is low. Business confidence is declining. Levels of the investment looked to be falling. Simultaneously, the government is looking at austerity once more with the intention of reducing support for those in need in the country.
All the signs are that we have a shortage of demand within the UK at present because of falling confidence created by the fact that households are now, or do expect to be, squeezed in the level of consumption that they might be able to enjoy due to price increases forced upon them by circumstances entirely beyond their and the country's control. We are, then, in the exact opposite position of the one in which a monetary policy committee should decide to increase interest rates to control inflation.
The economic impact of those price increases, for fuel, energy, food, and other essential products, is, in fact, exactly akin to that created by an interest rate increase. What those price increases do is reduce demand within the economy for the supply of other goods and services that people might otherwise acquire. In other words, those price increases might fuel inflation, but what they also do is reduce other demand in exactly the same way that an interest rate increase is supposedly intended to achieve.
The imposition of an interest rate increase in this case is, therefore, a double whammy. Not only is the economy already suffering a reduction in demand because price increases have been imposed upon it for reasons that we cannot control, but an interest rate increase then imposes another price increase (that for money itself), that households cannot control, doubling the impact of the reduction in demand and necessarily increasing the risk of major economic downturn, depression or even recession if the combination of these factors become becomes deeply oppressive, as I think it might.
How and why those tasked with managing monetary policy cannot see or understand this completely baffles me. Their incomprehension of economic reality is staggering. Despite that, and even if the Bank of England does this week decide not to increase rates, as I think is likely, I suspect that this will only be a decision postponed and the Bank of England's continuing war on the well-being of people in this country will be resume shortly thereafter, as a result of which Labiur will insist that it has no choice but to also cut government spending because it will claim that it has had a cost imposed by way of increased interest rates which it too has no ability to control when the exact opposite will be the case.
One day, it is just possible that this country might enjoy coherent economic management. Do not expect that any time soon.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Might this “Bankers’ Malady” be a result of attitudes placed somewhere on a spectrum between ignorance and finance self-interest?
Richard
You have talked about ‘The Economics of walking about’ Might I add another, the economics of driving about? Especially because I usually prefer to walk along the more traffic free roads.
My wife & I have both commented on how empty the roads seem at the moment in particular at evenings & weekends with sometimes almost no traffic. Clearly something is happening.
You are right
We are noticing it too
Interesting observation John. Last Sunday I was travelling to and from Swansea along the M4. I noticed more cars than is usual driving in the left hand lane at speeds of 50-55mph. It struck me that perhaps there are more than a few drivers wanting to get the best out of their mpg.
I returned to Germany a few weeks ago after spending a couple of months in England after attending the Cambridge event. I travelled quite extensively throughout the West Country visiting friends and family and the reduced amount of traffic was glaringly noticeable, especially in the evenings and especially noticeable after 8. My German wife reckons it’s because everyone is so skint they can’t afford to go out. She also noticed how increasingly shabby everywhere looked. My brother taught her a new word – ‘scummy’. She does love Dartmoor though
I agree re shabbiness
But that might be what is called fashion
I sometimes look at Vogue as part of the economics of walking about. I am sometimes baffled by what passes for street fashion, male or remale. Shabby is a good word for much of it. It reflects the era.
They say the Devil has all the best tunes, and seemingly has all the best polices to propel us into Fascism.
I’m watching the BBC’s ‘The Nazis: A Warning from History’. It’s like listening to the radio or reading the papers today, here in Britain but a damn sight more well presented and clearer to understand.
I was recently chatting to a couple in their 30s with two very small children. They were suffering from anxiety caused by two main problems. Unfortunately, the husband had recently received some very worrying health news, “out of the blue”. Whilst I wish him well and hope that this cloud soon passes, I was concerned to learn that they have no insurances in place to help with the other big worry they have which is their mortgage.
I understand that there is a mortgage with Halifax currently at a rate of 2.00%. This means that they pay about £1,785 each month on the £350,000 loan. This deal is coming to an end soon. They have been told that the lender’s standard variable rate is 7.24% and, for reasons that are not entirely clear to me – I suggested talking to an ethical mortgage broker – they might fall onto this rate. This means that their monthly payments will rise to about £2,807, or by well over £1,000 a month. This is unaffordable – As I said, I wish them the best, but they are caught between a rock and a hard place and the car might go, which is on PCP.
When borrowing lots of money, make sure you insure the “breadwinner” in case of disaster – I’m not quite sure, but I suspect that had this unfortunate couple been properly advised at the outset of the mortgage, they would probably be paying it off now.
Good advice
‘their incomprehension of economic reality is staggering’. <p>
It is indeed. But BBC will never ever ask – ‘how exactly will raising UK interest rates mitigate price rises in imported energy , food and other commodities coming from the war zone?<p>
It seems literally medieval – the four humours or whatever the received wisdom was – it just cant be questioned. If such a simple question cannot be asked – does that mean that the establishment is really aware how fragile their rule is? <p>
Andrew, I’m copying that question to paste as a comment anywhere I see someone talk about raising interest rates on socials. And to ask anyone I talk to when it comes up.
If the media won’t ask that question we have to ask it for them.
“how exactly will raising UK interest rates mitigate price rises in imported energy , food and other commodities coming from the war zone?”
Hope you get somewhere with that Kirsten – but not hopeful
The self fulfilling prophecy, interest rate rises will add to inflation.
I too have noticed fewer people out and about. Particularly in bars and restaurants on last Saturday afternoon and evening.
“How and why those tasked with managing monetary policy cannot see or understand this completely baffles me.”
I’m not convinced that they are incapable of seeing and understanding it – I think it’s more that they refuse to, because, if they acknowledged it, then they might have to take actions that they believe, (incorrectly, except in the context of the satiation of unconstrained greed), would prejudice the interests of the tiny affluent segment of the populace that they serve.
perhaps worth noting whilst the article , obviously, is about central banks inclination to increase base rate, Japans current base rate is 0.75% and the three members wanting to increase it were arguing for 1% wheras Uk is currently at 3.75%
Agreed
I would go a step further and say that when the price rises are external rather than domestic, higher interest rates means higher costs of holding stock (not just fuel but any stock) and servicing debt (which many large companies seem to have loaded up on). Higher cost of business suggests HIGHER prices. If there is insufficient margin for a company to be willing to reduce their margin, then the impact of higher interest rates from external supply factors is higher inflation.
It’s not that the lever may not be as effective at trimming inflation as they’d hope, the genuine question is whether it will actually fuel inflation instead.
It will
[…] there is nothing that can be done about this by increasing interest rates is also […]