The Bank of England has raised interest rates to 4%, supposedly to tackle inflation.
There is just one problem with this decision. The Bank knows that much of the inflation we are suffering is being driven by rising oil and energy prices, largely resulting from conflict in the Middle East.
It also knows that raising interest rates cannot reduce those prices.
So why is it doing this?
The answer is that the Bank believes it must suppress demand elsewhere in the economy to compensate for rising energy costs.
In other words, it is deliberately making mortgages more expensive, increasing business borrowing costs, discouraging investment and reducing household spending power.
And all this when people are already struggling with higher energy bills. That is problem number one.
There is, however, another problem. Higher interest rates increase costs for businesses, which can then feed through into higher prices. They can, in that case, add to inflation rather than reduce it.
The Bank is imposing economic pain to address a problem its chosen policy cannot directly solve.
That is not sound economic management. It is the consequence of an economic dogma that refuses to recognise the difference between inflation caused by excessive demand and inflation caused by supply shocks.
When will we learn?
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More orthodox, neoclassical economic illiteracy from the MPC.
When, indeed, will they learn?
On the news this morning a commentator appeared to think that raising the Bank rate would reduce the price of oil. I despair!
Me too.
It’s theological. Faith is a belief without evidence
I offer this poll:
· The Monetary Policy Committee of the Bank of England really do believe that
a) If prices rise it is called inflation.
b) When inflation occurs, it is their duty to act.
c) The only thing they can do when inflation is evident is to raise interest rates.
· They all really believe that, in the circumstances that now pertain, the rise in Bank interest rates that is now required will reduce inflation.
· The Committee believe they may lose their positions, and the status that goes with it, unless they do what the Governor says, and they all get kudos for managing interest rates.
· Neither the Governor, nor the Committee members, would understand, and accept the logic of, the above post if they read it.
· There is a better explanation.
What I find infuriating is that our news media, supposedly the “champions” of their publics, meekly report the Bank’s execrable action with no dissent. As if the BoE were the High Priests, who must not be questioned. Appalling.
Agreed
I immediately came here for your response, after seeing the rate rise. I suppose the backgrounds of various members of the Monetary Policy Committee will inform their decisions. It’s a disaster for me. Do they want us to lose our jobs and homes? Neoliberal tosspottery.
Yes, they do want you to be in economic stress. That is their goal.
A point you have no doubt made before, but worth mentioning again on days like today: raising interest rates increases bank profits. It is pretty much automatic.
So, do we appear to have a bunch of people working in, or previously having worked in, the banking industry, or jobs closely related to banking, voting “reluctantly” to line their own pockets? Or even the pockets of their close friends and colleagues? If so, wouldn’t you expect journalists working in the financial field to take an interest in this and challenge this from time to time?
I would suggest that this is one very big reason to follow commentary such as we find on this blog rather than the same old same old that the MSM churns out all the time.
The banks will earn more than £1 billion from today’s increase. There will be a blog in the morning.
I think Charlie Bean – ex BoE did admit on WATO that raising interest rate it wouldn’t affect the price of oil/gas etc but had to be done ‘in case’ there might be a spillover into prices in the domestic economy.<p>
Pretty thin logic but at least there was an admission that this is all based on a judgment of how the economy ‘might’ be impacted by externally generated energy price rises.<p>
So often the reporting has been – that whatever the source of inflation – external or internal – interest rate just had to rise.
That supposed causal link is absurd.
The link is that the rate rise might increase inflation.
The full analysis acknowledges that any second-order inflation may arise quicker or sooner, and that some studies suggest as long as 4 years and others as little as 9 months, with recent UK evidence leaning towards the latter.
It states that if the effect is quicker then it should act sooner to higher inflation (that it can affect) but should be less activist against what ‘might’ happen further down the line.
It then seemingly decides to take an interpretation in between (despite evidence that the effects are quicker in 2026 UK), meaning that it targets fears of second order inflation arising in the future.
However, it previously used a shorter timescale expectation to justify decisions, so it seems to be willing to pick and choose from the studies to fit a conclusion – that interest rates should be higher.
It’s similar on growth – evidence is given that it’s supported more by reduced saving, increased debt and spending savings, yet it concludes that the outperformance on growth is solid and it’s actually the output gap that’s illusory.
It has the evidence in its publication. That it abuses them to justify the outcomes it chooses suggests an agenda, and not one that favours the British public.
Thank you
I can’t see this incompetence being changed until the neoliberal twaddle is ousted, and BoE independence is made history. Even then, we will also need a BoE governor who has non-neoliberal views.
Agreed
As First Lord of the Treasury, Burnham should get rid of the MPC and get rid of Bailey.
I agree.
And they talk of the ‘loony left’.
This is like 2 +2 = Fish.
If any thing, it proves that if you want people to do and advocate the wrong thing, you really have to pay them lots of money to lose their conscience – don’t they Mr Bailey (£646,000 a year, plus a pension allowance of £99K p.a.)?
https://moneymaker-times.com/2026/06/07/andrew-bailey-net-worth-salary-governor-of-the-bank-of-england/
I agree with all you say above- that inflation will not be affected one jot by raising interest rates which can only make matters worse.
So, why do it? It may be to protect financial institutions from the effects of such inflation by trying to keep real interest rates(bank rate minus inflation rate) positive, preserving the value of the pound, at least in theory. I’m sure we were very close to zero or negative real rates in recent memory without too much concern by the Central Banks. They seem to have forgotten that.
Likely to increase demands for higher wages and probably increased industrial action by workers.
It’s a good point. “My mortgage/rent has become crippling expensive – I must have a pay rise”. Only thing I’d disagree with – industrial action is unlikely given de-unionisation and underemployment in this country”.
It’s like watching suicide chess! For the uninitiated that’s where the goal is to lose all of your pieces or run out of moves.
I agree with all of the above, inflicting pain on the population and damaging the economy is sheer madness. What policies could / should the BoE and or government put in place to deal with the inflation running above target or should things be left to run as they are?
I would certainly not suggest doing nothing. But I would start by asking what is causing inflation, rather than assuming that the answer must always be higher interest rates.
If inflation is being driven by energy, food, housing or other supply costs, making mortgages more expensive and increasing the cost of business investment does very little to address those causes.
I would favour targeted measures to reduce those pressures, including investment in renewable energy, home insulation, public transport and measures to tackle excessive pricing where market power permits it.
I would also stop quantitative tightening, which is an unnecessary additional restriction on the economy, and reform the way the Bank of England pays interest on commercial bank reserves. There is no good reason to provide banks with excessive returns simply because interest rates have been raised.
Taxation also has a role, particularly where it can reduce excessive demand or redistribute purchasing power away from those least likely to suffer hardship.
The important point is that inflation policy should address the causes of inflation. It should not rely on deliberately creating unemployment, reducing investment and making households poorer.
We need to manage inflation while protecting employment, essential services and the productive capacity of the economy. Those objectives are not incompatible.
“ The important point is that inflation policy should address the causes of inflation. It should not rely on deliberately creating unemployment, reducing investment and making households poorer.”
Brilliantly concise. Needs to be repeated, loudly, at every opportunity.
Thank you
Could the Bank of England argue that an increase in the base rate will attract an inflow of hot money? This would increase the value of Sterling, particularly against the US$, making energy imports priced in US$ relatively cheaper. In turn, this helps reduce input costs for firm and reduces the pressure to raise prices.
Attracting hot money has always been BoE policy, not last through our tax haven branch offices such as Jersey. This is deeply destructive economic policy.
I have just watched the BoE governor on Channel 4 news. He was asked whether he was worried about events in France and all he said was that he was because….it was causing volatility in the markets! It was almost Marie Antoinettish in its denial of reality. The man is a clear idiot.
Agreed. It is also utterly bizarre how these events are being presented in the media. There is collective denial about their reasons.
I am struggling to understand your statement “the Bank believes it must suppress demand elsewhere in the economy to compensate for rising energy costs.”
Since people have to spend more money on energy costs, surely demand elsewhere in the economy will have automatically dropped.
I would have thought that the main reason that the BoE has raised interest rates is to impress on working people that they must not attempt to defend their standard of living by demanding wage increases.
Your logic is right.
Their logic is at fault.
That, plus their desperate desire that people should not try to make good their losses through wage rises, while capital is protected.
A dogmatic insistence on inconsistent theory that is demonstrably false in practise will not be abandoned through “learning”. They couldn’t care less if its false or harmful to the majority, they are protecting powerful interests, like the servile but well rewarded careerists they are conditioned to be by their instititional formation.
“The rich make their money from assets; the rest of us make our money from wages. The Bank of England is punishing wage earners to protect the value of the assets of the rich.”
In a nutshell
ttps://www.commonweal.scot
And spot on
When I saw the MPC news last night, I immediately thought “that will upset Richard”.
The MPC & BoE Governor could be replaced by AI, I’m not sure anyone would notice the difference. Or maybe a one-arm-bandit machine? “Look, three lemons=quarter point rise. Three barrels of crude=half point rise. CHING!”.
That genuinely made me laugh
No danger of groupthink among the nine members on the BoE MPC. is there?
I think I am correct with the following.
Education backgrounds all include at least one of Oxford, Cambridge, Harvard and Princeton
Employment backgrounds all involve, and are largely limited to, Central Banks or Financial Corporations/Institutions apart possibly from Dr Swati Dhingra who is an Associate Professor at LSE.
At least five have backgrounds which include education or employment in USA, two actually being American.
One would expect relevant experience and expertise to be represented on a decision making committee whose deliberations affect everyone’s lives but there is plenty of evidence that better decisions come when diverse perspectives are present.
Are they on the MPC?
They’re chosen to be like those appointing them