The Governor of the Bank of England, Andrew Bailey has confirmed, after the markets response to the lower-than-expected interest rate increase last week of 0.5% pa and the ill received ‘Tax Cutting Mini Budget’, to not hesitate to increase interest rates to protect the value of the £ against the $ as it weakens even further.
Investors are now switching £ and € to $ as they earn more in interest. This has weakened the £ and the € meaning that imports, in particular energy, priced in $, is even more expensive now and set to keep inflation high.
We suggested several times over the last few months that the Bank of England needed to make more aggressive decisions increasing interest rates and they did not whereas the Federal Reserve did. We believe this is because the government needs inflation long term to devalue public sector debt.
We will see, but we hope rates do go up, despite its knock-on effect of recession, bigger mortgage interest payments and ultimately business failure, redundancy, and house repossessions. It is going to be painful, but the reality is that interest rates have average over 4.25% pa since the Bank of England started on 27h July 1694. It is only in the last 14 years that people have become lazy and accustomed to record low interest rates and inflation.
We will tighten our belts and we will get used to more expensive borrowing as we must do to stabilise the economy and return to ‘normal’ with a stronger £.