Inflation is rising. Will the Bank of England raise interest rates?

SUMMARY

Richard Murphy, political economist, addresses the recent rise in UK inflation and the potential for the Bank of England to increase interest rates in response. He argues that current inflation is driven by supply-side shocks rather than excessive demand, and warns that raising rates could worsen the cost-of-living crisis without addressing the root causes.

MAIN POINTS

• UK inflation has risen to 2.9% with expectations of further increases due to rising energy and food prices. [0:00]
• Households are reallocating spending to essentials as wages stagnate and unemployment rises, limiting their ability to absorb higher costs. [1:00]
• The Bank of England may raise interest rates despite these being ineffective against supply-driven inflation, with markets anticipating such a move. [2:00]
• Murphy highlights that the government has legal authority to intervene and prevent rate hikes, but political leaders often defer to Bank independence. [4:00]
• Rising interest rates are expected to increase household hardship, unemployment, and recession risk, while politicians avoid alternative solutions. [6:01]
• Murphy concludes that the crisis is avoidable and urges political action to prevent unnecessary economic suffering. [7:00]

DETAILED ANALYSIS

UK inflation has climbed to 2.9%, defying expectations of a seasonal decrease and raising concerns about the economic outlook. The primary drivers of this inflation are external supply shocks: a 13% projected rise in household energy prices, ongoing disruptions in the Strait of Hormuz affecting energy imports, and drought-induced food shortages. These factors are pushing up the prices of essential goods, forcing households to divert spending from non-essentials without any increase in overall disposable income.

Wage growth has stagnated and unemployment is rising, leaving many unable to absorb further cost increases. Despite these conditions, the Bank of England is considering raising interest rates, as three members of its Monetary Policy Committee have already voted for hikes, and financial markets are pricing in this possibility. The Bank's mandate focuses narrowly on controlling inflation, using interest rates as its primary tool, even though such measures are largely ineffective against inflation caused by supply constraints rather than excess demand.

Higher interest rates would not resolve shortages of food or energy but would increase borrowing costs for mortgages, rents, car finance, and credit cards, further squeezing household budgets. Murphy points out that the government possesses the legal authority under the Bank of England Act 1998 to direct the Bank in emergencies, allowing it to prevent unnecessary rate increases. However, he criticizes both current and past political leaders for hiding behind the principle of central bank independence, thereby avoiding responsibility for the economic consequences.

He warns that raising rates under these circumstances would likely deepen the recession, increase unemployment, and exacerbate inequality, all while failing to address the root causes of inflation. Murphy concludes that this crisis is not inevitable but is the result of political choices, and he calls for informed, proactive intervention to protect households from avoidable economic harm.

LINKS

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