Expert comment: Bank of England increases the interest rate
Salford Business School Economist, Dr Tony Syme, shares his thoughts on the Bank of England increasing the interest rate for the 13th consecutive time.
“Following yesterday’s news that inflation remained static at 8.7%, the Bank of England has responded by putting up interest rates for the 13th consecutive time.
“Given that last month’s fall in inflation was explained entirely by last April’s 50% rise in gas and electricity bills falling out of the calculation, there is plenty for the Bank of England to be worried about. The UK has the highest inflation rate in the G7 and, within the G20 countries, only Turkey and Argentina have higher rates of inflation.
“In last month’s Monetary Policy Report, the Bank of England blamed high inflation on two factors: Russia’s invasion of Ukraine leading to big rises in the prices of gas and food basics, and unfilled job vacancies leading to high wages.
“The first factor may explain why inflation is higher in the UK than elsewhere. The UK has a greater reliance on gas for heating homes than elsewhere – 85% of British homes are currently heated by gas – so UK inflation is strongly impacted by changes in the international gas prices. And in terms of food, the UK is the world's third largest net importer of food and drink, according to the Food and Agriculture Organization of the United Nations. This is another factor that means UK inflation is largely driven by international rather than domestic factors.
“To reduce this dependency on the primary causes of the current inflation require not interest rate rises, but investment in sustainable energy and food production. Higher interest rates will only harm that investment.
“What of the Bank of England’s vacancies and wages argument. Last week’s Labour Market Overview by the ONS reported that vacancies fell for the 11th consecutive period. This is at odds with the Bank of England’s “lots of job vacancies, and employers are having to offer higher wages to attract job applicants" argument. The report also highlighted a record number of people of employment, with increases in both the number of employees and the self-employed.
“Wages have risen by less than the rate of inflation since August 2021. This is a sign of the economic distress that households have faced over the last couple of years. It is not a sign that they have caused that inflation. And yet the Bank of England continues to raise interest rates, continuing to put households under more stress.
“Is it effective? No. The primary causes of the current inflation are international and require investment to address, even if that is a longer-term view.
“For 13 consecutive times, the Bank of England has put up interest rates hoping to bring inflation under control, but without success. They are doing the same thing over and over and expecting different results. It’s time for a different remedy.”
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