In order to effectively control inflation, policies need to focus on the underlying causes. A rise in interest rates right now assumes that the main cause of rising prices is excess demand for goods and services. As I see it however, our rising cost of living has more to do with:
- The destruction of the currency as a result of Quantitative Easing (money printing).
- Rising input costs caused by higher commodity prices such as oil and ‘soft’ commodities like coffee, cocoa and corn.
Clearly the increases in VAT and fuel duty have also contributed to more recent rises but none of these factors will be helped by a rate rise and rather any rise is likely to:
- Reduce spending by consumers and businesses even further and increase saving – a good thing but not what the Bank of England (BOE) want.
- Increase mortgage payment costs.
- Damage exports by boosting the value of sterling.
- Have a negative impact on an already shaky stock market.
- Threaten to burst the UKs housing bubble.
It’s also worth noting that changes in the official Bank Rate take around two years to have their full impact on inflation. So even if rising rates are effective, our cost of living looks set to remain high for some time yet.