Could the Bank of England bring the economy down?
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Could the Bank of England bring the economy down?
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About this listen
The Bank of England has held interest rates, but the real story is what happens next. Beneath its decision, pressure is building to raise rates again, and that could prove disastrous.
In this video, I explain why that is the case. The inflation we are facing is not driven by excess domestic demand. It is being driven by war, supply shortages, and speculation in global commodity markets. Interest rate rises cannot produce more oil or resolve supply disruptions, but they can further suppress demand in an already weakening economy.
That is the risk we now face. Raising rates in these conditions could accelerate the move toward recession, increasing business costs, reducing investment, and undermining confidence. There is a real danger that central banks could turn a fragile situation into a much deeper economic crisis.
The problem, at its core, is that central banks are applying the wrong theory to the wrong problem. When inflation is supply-driven, higher interest rates do not solve it. They can only make it worse. And unless that is recognised soon, the consequences could be severe.