Interest rates are expected to quadruple within months after the Bank of England put up borrowing costs for the first time since Covid hit in a scramble to stave off runaway inflation.
Threadneedle Street’s surprise decision to lift the Bank rate from 0.1pc to 0.25pc came as it warned that Consumer Prices Index inflation could hit 6pc next year, the highest level since February 1992, in a major blow to the living standards of millions of people.
Financial markets and economists are now predicting three more rate rises in 2022, the first of them within weeks, with rates potentially rising to 1pc – their highest since 2009 – as early as next August.
1% interest rates are hardly a horror. And with inflation at 6% they’re, in real terms, at minus 5%. So not even effective at reducing inflation really.
But inflation management is all about expectations. What do folks think is going to happen? That the BoE seems to be taking the risk seriously means we can all assume that BoE will take it seriously. Therefore less of it will happen – expectations won’t become so anchored.
Showing willingness to try to deal with inflation will reduce the amount of inflation that happens. Or, if BoE starts to say this is permanent, then does something, then it won’t be permanent.
Which is good.
What’s better is that it will enrage the P³. Who can’t allow the connection between QE, money supply and inflation to be made. For if it is then MMT becomes a hugely less useful theory, there are more real constraints on what Govt can do. So, he’s going to keep insisting that the inflation is temporary, is only supply chain stuff, is nothing to do with money supply. Probably carry on with the current claims that BoE are fascists wanting to kill people in support of neoliberalism in fact.
Not because they are, of inflation doesn’t have anything to do with money supply, but because it’s not convenient to the narrative. MMT is perfect and lovely and free cash. Because this is so anything to contradict is wrong and anathema.