A hammer blow for households — and it won’t even work

And two very different verdicts

THERE is deep concern across Britain about the impact the Omicron variant will have on business and the economy.

So the Bank of England’s shock decision yesterday to go it alone and raise interest rates is truly baffling. My fear is that it will prove a hammer blow to prosperity.

During emergencies, as we saw at the start of the Covid crisis last year, it is the job of the Government and the Bank to do all in their power to prevent scarring to the economy, jobs and households.

But the Bank has done just the opposite of that. History shows how raising rates unexpectedly and unilaterally can backfire in the most devastating fashion.

During the financial crisis in 2008, the European Central Bank chose to raise rates – ostensibly to avert a cost-of-living crisis across the EU – without consulting America’s Federal Reserve or other major players.

That decision led to a devastating slump in the Eurozone and established a legacy of unemployment that has bedevilled some EU countries ever since.

Admittedly, the Bank of England’s new rate rise comes from the lowest level in more than 300 years. As my colleague

Ruth Sunderland writes below, the vast majority of homeowners are on fixedrate deals and it is unlikely to have an immediate deleterious effect on the cost of mortgages.

But interest rates are a sledgehammer, not a scalpel. Hiking them will do nothing to end the destructive volatility in global energy costs or the supply bottlenecks around the world – which led to higher prices – that are being caused by the unwinding of Covid restrictions.

Next year, inflation is already set to leap to 6 per cent – triple the Bank’s target rate. More than doubling the Bank rate will do nothing to control petrol prices, which are now up 29 per cent year-onyear, electricity prices (almost 19 per cent higher) and natural gas, up 25 per cent.

Inflation certainly will have to be tackled in the spring if it is not to poison the economy. But this was the wrong action at the wrong time.