Bank of England (BOE) Governor Andrew Bailey at the press conference in London.
(Photo: Bloomberg)
Inflation punishes late arrivals. This adage, slightly modified, sums up the Bank of England’s dilemma. The British central bankers have long reacted too hesitantly to the sharp increase in prices and now want to drive away the specter of inflation with a massive interest rate hike of 50 basis points.
But history can also be interpreted differently: it is quite possible that Great Britain will be the first major industrial nation to experience the bitter experience that other countries are yet to come: namely that the hydra of the current inflation can only be defeated by a recession.
In this respect, the continental Europeans from the euro area should also keep a close eye on how the British central bank manages to tame inflation without plunging the country into a long economic downturn.
The Bank of England has now had to tighten its course after its cautious rate hikes since December of last year have hardly dampened the rise in prices. The central bankers have little influence on the most important causes of inflation – rising energy and food prices. However, as in the rest of Europe and the US, there are signs in the UK that consumers, trade unions and companies are planning higher price levels on a permanent basis.
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As right as it is to take a stand now against this inflationary trend, it is also necessary to continue to keep an eye on the risks of the turnaround in interest rates. The danger is that the central bankers, with the guilty conscience of being late, will now overdo it and cause more damage to the economy than necessary. Slamming the brakes doesn’t help anyone. Especially not for consumers and companies, who, after the inflation shock, now also have to put up with the interest rate shock.
More: Historic hike: British central bank raises interest rates by 0.5 percentage points