Interest rate strategy

The latest inflation figures have just come out and inflation remains unchanged at 4%. Last month, with inflation at that level, the Bank of England left interest rates unchanged so they will probably do the same thing this month.

I’ve long considered that the Bank of England are out of touch on this one – inflation rose steeply and continues high because of Russia’s invasion of Ukraine and the consequent increase in energy costs. The current inflation is not demand led and so raising interest rates does nothing to curb demand or reduce inflation – the Bank of England could interest rates up to 30% and it would not make the slightest difference to the current level inflation.

To illustrate my point about being out of touch and looking at the wrong thing, you only have to look at the recent story about the monthly questionnaire that the Bank of England sends to thousands of chief executives and finance directors.

Despite only 1 in 10 businesses actually exporting anything and the fact that the Brexit vote was nearly 8 years ago now, in the monthly survey the bank asks about the level of “uncertainty” Brexit has caused.

Forget the uncertainty caused by the unprecedented COVID lockdowns, Russia’s invasion of Ukraine, the Gaza conflict, the shipping attacks in the Red Sea, the Bank is fixated on Brexit, and only in a negative way, conveniently ignoring any benefits that might accrue from no longer being part of the United States of Europe.

It’s a classic example of the bank focusing on the wrong thing to formulate its policy decisions.

No wonder the Bank is keeping interest rates way above where they need to be!