We are treating the disease with the wrong medicine
If you apply the medicine of higher interest rates in these circumstances, you are not just choking off excess demand, but choking people’s finances and choking the economy. There is a huge hit coming to people with outstanding mortgages and those who over the coming months find themselves in debt.
Most of the Bank of England’s interest rate rises won’t have even had their full impact – many people on fixed-rate mortgages, set before inflation rose, won’t have renewed, and seen their costs go up. If anything, with inflation falling and demand weak, the Bank should be cutting interest rates. The problem for the Bank of England is that its primary mandate is for 2 per cent inflation and its sole lever is interest rates. With inflation still at nearly 7 per cent , the pressure will be to raise interest rates further. That path is likely to lead to falling demand, more business failure, higher unemployment, and a worse economic downturn.
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