Interest rate rise will hit your wallet hard and cause a deep economic recession

The Bank of England: its interest rate rise will hit you hard in the wallet.

The Bank of England has increased interest rates by a huge (for these times) 0.5 per cent in an apparently inexplicable move that won’t do anything to stop the current enormous increases in the cost of living.

What can possibly have possessed the Monetary Policy Committee at Threadneedle Street to do this monstrous thing?

The bank’s own forecasters are predicting that inflation will remain above 10 per cent until at least October 2023, putting huge pressures on ordinary people.

The bank is already predicting that the UK will fall into recession this year, and the interest rate rise will prolong it – so that, in three years’ time (after the next general election, take note), unemployment is expected to stand at six per cent of the workforce – and rising.

Energy prices – the main cause of the cost-of-living crisis – are expected to fall back during this period, although the predictions don’t take this into account. The hike in interest rates will not reduce the cost-of-living crisis in any way.

And the ultimate result, as Professor Simon Wren-Lewis points out in his latest Mainly Macro article, will be to reduce inflation to a point far lower than the Bank of England’s two-per-cent mandate permits. Who benefits from that?

Professor Wren-Lewis adds that it is possible the bank expects a new Tory prime minister – whoever that may be – to introduce support for people on low incomes in a bid to stop the excessive inflation and recession.

But there is no indication from either Liz Truss or Rishi Sunak that they will do that; tax cuts promised by Truss will go to rich people and/or corporations.

And, as Professor Wren-Lewis points out,

Excessive monetary tightening based on a guess of fiscal loosening is a dangerous game to play.

Sadly for most of us, the danger applies only to the poor, working people who actually keep the economy moving.

Source: mainly macro: Why does the Bank of England appear to be ignoring its mandate?

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