by Ruth Sunderland A hike to exorcise the demon of inf lation... if only it had come sooner
CALM down, everyone! No-one ever wants to see interest rates go up, but Governor Bailey has done the right thing.
Many were amazed by yesterday’s decision, but in my view he should have acted earlier. Any more failure to tackle the growing inflation problem would have amounted to a dereliction of duty.
For the past 30 years, the Bank has made controlling inflation its core mission because of the appalling social and economic harm that it creates. If Bailey had not raised rates, he would have thrown his credibility and the Bank’s to the dogs.
Those who are arguing so volubly against a very modest rise need to get a grip. They seem to have forgotten that the Bank slashed rates in two emergency cuts when the virus struck in March last year, taking them to near zero.
Rates have now risen to just 0.25 per cent, which is not only still extremely low by historic standards, but also significantly below the 0.75 per cent base rate that stood immediately before the pandemic.
When I bought my first property in the 1990s, I would have given my right arm for rates like this. It’s worth remembering that around three quarters of borrowers have fixed-rate homeloans, so will suffer no immediate pain. The Daily Mail’s Alex Brummer points out correctly the Bank has no control over some elements of inflation, such as energy bills. But by raising rates, Threadneedle Street has sent a clear message that it takes inflation seriously. A small increase is a price worth paying to exorcise that demon. The hope now is that a modest hike will avoid the need for more painful ones in the future.
And, of course, it is not irrevocable. If inflation does turn out to be only temporary – or the economy weaker than thought – it can always be reversed. So let’s get some perspective.