It would appear that the long run of slow interest rate rises may be coming to the end with the announcement of a market surprising rise from the MPC and the discovery of high inflation. This should be worrying for two big reasons. Any interest rate rise implies serious human costs in an economy with lots of personal debt; lost homes and bankruptcies. This interest rate rise is particularly problematic because all of the reasons that I cited in explaining why interest rate rises have been moderate up till now still apply. The manufacturing sector is still looking fragile and economic performance is still heavily dependent upon consumers keeping on spending.
Controlling inflation has become so imperative that these risks to economic performance have had to be taken. It is probably too early to start talking about stagflation and it is quite possible that this change in interest rates will bring inflation quickly under control. However, the Bank of England haven't been given much help in controlling inflation from fiscal policy for quite some time and if things don't go well we might be headed into dangerous territory. If Labour government ends in this kind of economic ruin again will the country forgive them?
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