George Lagarias, Chief Economist at Mazars, comments: “Last week, the MPC, the Bank of England’s rate-setting body, decided to raise the basic interest rate by a quarter of one per cent. At 0.75% it is still very close to the all-time low and certainly far below any sort of inflation-fighting terminal interest rate. Nevertheless, comments from the Bank were relatively dovish. Members acknowledged that inflation will rise due to external price pressures, and there’s precious little they can do about it. So why would any central bank raise rates at all if inflation can’t be fought off?
“The theory says that higher rates should reduce inflation pressures via many mechanisms. They could reduce demand for houses and help control prices or deter consumers from leveraging up and increasing demand. They could also deter companies from leveraging up and expanding, raising prices. Ultimately, however, current inflation is external and can’t be controlled. It is the confluence of post-pandemic supply chain disruptions exacerbated by shortages due to sanctions on Russia. It will rise as global companies compete for diminishing resources. It will drop when production is, somehow, restored or equilibrium otherwise reached. None of these can be controlled by the Bank of England. In an interconnected world, its decisions are much less relevant to inflation than in the decades past. At best, the institution can make an effort to keep some homes affordable. That is the real extent of its reach. At worst, its decisions may hamstring the post-pandemic economic recovery.
“Mr Putin in 2019 said that the international liberal order has become obsolete. Other autocrats around the world might share his opinion. So he challenged it. The sprawling consequences of his war pose unequivocal proof that globalisation, the mechanism behind the global liberal order, is alive and kicking.”