When you do building work in your home things around you usually get very bad before they get better. The moment comes when you have had enough of eating meals cooked in the microwave in the spare bedroom and washing dishes in the sink in the bathroom. The new kitchen and living room seem far away. You keep going and soon you enjoy your very modern and very nice and airy open plan kitchen and living room. If we use modernising your home as a metaphor for the British economy, we are still eating in the spare bedroom and washing dishes in the bathroom, the new kitchen is packed but it is not installed yet. It is a time to “keep calm and think before we touch interest rates”.
Unquestionably inflation is raising its head in the current climate. Those of us who remember the seventies smile at the idea that a 5% inflation rate could be considered a threat, but we have lived with very low inflation and stable prices for a long time.
The economy has begun its recovery from COVID imposed lockdown, unfortunately all of this is happening during the change in the framework of our economy brought about by Brexit. Costs in the supply chain of consumer goods are rising, both food and non-food. The Chancellor is still under pressure to provide financial support to struggling companies that are struggling to cope with the post-lockdown stage. A lot of commentators take it for granted that the Bank of England will raise the interest rate (currently 0.1%) to fight inflation. The Government is still “supporting the economy”, i.e. helping out with incentives or contributions; in other words, either taking less money in or giving out money or both. A higher interest rate would mean an added pressure on the treasury. It may also be hurting businesses that had a very difficult 2020 and 2021 and are hoping to improve their balance sheet in 2022, but the improvement has not started yet. Rising prices means that extra money will be required for necessities and less will be available for consumer spending.
It really sounds like squaring the circle. In an article published on 21/10/2021 Reuters states that the Bank of England will raise interest rates to 0.25% in the first quarter of 2022. Still incredibly low compared to the times of the double digits interest rates seen in the seventies, but that will mean raising them by 150%. The Chancellor, the Treasury and the Bank of England need nerves of steel to find a strategy that controls inflation but does not send the economy in reverse when it has not been moving forward in second gear yet.