Latest interest rate hike risks overkill

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The size of the recent drop in UK inflation, from 8.7 per cent in May to 7.9 per cent in June, surprised many. However, this decline was far from unexpected for keen observers tracking broad money fluctuations. Indeed, further significant reductions are inevitable into this year-end and next.

The Bank of England’s mismanagement of inflation has attracted intense scrutiny and justifiable criticism. One only needs to look at the handling of dissenters from the prevailing Keynesian orthodoxy to understand the magnitude of the Bank’s groupthink.

Its actions, especially the pandemic-triggered money supply surge, have ignited a self-inflicted crisis. This outcome underscores the danger in discretionary monetary policies and inadequate oversight, fuelling calls for a more credible, rule-oriented framework.

The Bank's bleak growth forecast continues to warn of potential recession risks, while persistent inflationary risks necessitate vigilance rather than further interest rate hikes. The Bank must avoid stifling economic growth. The approach should be cautious and prudent, as the Bank seeks to atone for prior indifference and misguided predictions of 'transitory inflation'.

With broad money contracting, signs of an economic slowdown and disinflationary trends are clear. The effects of prior forceful monetary tightening – the full repercussions of which are yet to materialise – are already apparent in consumer and business spending behaviours, despite signs of short-lived economic resilience.

As we brace for harsher financial conditions, the government's ambitious pre-election pledge to slash inflation in half by year-end seems increasingly attainable.

However, the Bank must not overlook the profound ramifications of its decisions on the lives of ordinary people. Mortgage holders, for instance, are wrestling with the weight of spiralling repayments. With around 2.4 million fixed-rate mortgages coming due by the end of 2024, and a declining trend in house prices, the financial strain will inevitably grow.

Given its dual role – controlling inflation and maintaining financial stability – the Bank of England faces a crucial juncture. Being overly hawkish risks compounding past policy errors. It's time to hit pause, recognise the nuances of the present economic condition, and reflect on the importance of measured and steady monetary policy.

Damian Pudner

Director

Institute of International Monetary Research
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