The Bank of England is driving us into recession – and misery

The Bank of England has kept interest rates on hold at 5.25%. It says it may still need to raise rates if the war in Israel / Gaza impacts prices. It claims this is not the time to cut rates. And each of those decisions and claims is wrong. A thread….

The Bank of England says interest rates need to be high to cut inflation. Inflation is falling though, but not because of high interest rates. For example, next month, inflation will fall because gas prices have fallen recently.

Gas prices have not fallen because the UK has high interest rates. They’ve fallen because the international price has fallen as relative stability has returned to global energy markets after the turmoil when war broke out in Ukraine.UK food prices are also falling. But that’s mainly because the cost of our imports is down. And those prices are not affected in the slightest by the UK’s rate of interest.

The Bank also admits that the prices of manufactured goods are also falling. But we import many of them, and the price of such goods is falling in countries from Germany onwards. Again, that has nothing at all to do with UK interest rates.

The claim that inflation is being reduced by interest rates is, in that case, quite wrong. Or, to be blunt, simply not true. And frankly, the Bank of England must know that because they forecast that inflation is going to fall to 3% by the end of 2024.

So, the Bank of England think that the rate of inflation is likely to fall by nearly 4% over the next year. But despite that, they want to keep interest rates high – the hint is at the current rate – so that they can claim that by the end of 2025 inflation might be 2% again.

There’s one big flaw in the Bank of England’s strategy. It’s that the one area where inflation rates are still high is services. That’s not true of the most important services that we consume: they are things like education, healthcare and so on. But they’re paid for with tax.

So what services have gone up in price? Things like going out. But that’s because most small businesses run on overdrafts and have to pass interest rates on. And it’s things like car leasing – but that’s totally related to the rate of interest, too.

And then there are rents, of course – where the price people (and businesses) pay in the private sector is almost totally related to the rate of interest landlords pay – and so prices are going through the roof.

After which, there are things like phones, water, and so on – which go up simply because regulators let them do so by much above the rate of inflation – which they are doing because their costs of borrowing have risen, all because of the Bank of England.

In fact, in services, most of the UK rate of inflation is probably now down to the higher cost of interest that the Bank of England has imposed on us. In Sweden, where they have tried to measure this, they reckon about half of inflation has now arisen for that reason.

So, we are now in the perverse situation where the Bank of England says interest rates must stay high, even though that is creating inflation. And they say rates could rise because of situations wholly beyond our control again – like war, for the second time.

And meantime, the biggest cause of the remaining inflation that we have – and the reason why the decline in the rate will not happen as fast as it should – is precisely because high interest rates are forcing businesses to increase their prices in the services sector.

So, the bank’s policy is akin to saying that it wants low inflation rates but it is doing absolutely everything it can to prevent that from happening by keeping the one price that is really keeping inflation high – which is the price of money – which it sets – as high as it can.

It’s fair to ask if economic incompetence gets much worse than this – because that is what the bank is displaying. It’s ignoring all the evidence. It’s pursuing dogma. It’s pretending it has the power to change things for the better.

And in the meantime, businesses, households and even local authorities are being pushed to the brink by high interest rates that the Bank of England alone is imposing and which are making life misery for millions – and are pushing us towards recession.

I wish I didn’t have to say this, but the only rational conclusion I can come to based on the Bank’s behaviour is that what they really want is a recession. And what they will do to make that happen is keep interest rates high.

Why they might really want to do this I do not know – except that they are fixated on having interest rates above the rate of inflation for the first time in more than fifteen years as bankers see that as a sign of virility, which happens to benefit the wealthy.

For the rest of us, misery follows. But let me be clear: that’s not necessary. If you are living in financial stress that’s not for the good of the country. That’s because some incompetent people at the Bank of England have chosen to victimise you, and there’s no comfort in that.