BoE making things worse by raising rates yet again

Dr Syme said: “Living standards are now being eroded by inflation and the policies to address it will only make the living standards crisis even worse.

“The latest rise comes a day after the Federal Reserve announced the largest increase in interest rates since 2000 and two days after the Reserve Bank of Australia raised interest rates for the first time in more than a decade. They all cite the same reason: rising inflation.

“But that pursuit of the stable prices is likely to have serious consequences on a British economy that is fundamentally unbalanced. The Bank of England is only making matters worse. It should focus on co-ordinating with the Treasury to boost business investment and raise productivity. That will help to raise living standards and keep domestic inflation low in the long run, while changes to government policies around skills training and migration could tackle the current labour shortage in the short run.

“A rise in living standards is driven by rises in productivity and these are sustained by business investment. But the latest figures for business investment show that it is still 8.6% lower than it was in 2019 and, following a survey of its members, the British Chambers of Commerce recently revised downwards it projection for business investment growth in 2022 by over 30%.

“Without investment to drive forward permanent increases in productivity and, in the absence of any other supply-side factors to boost the British economy, living standards can only increase via short-term boosts to demand via trade, household consumption and government expenditure.

“While Brexit has had a negative impact on the UK’s trade balance, it has been the maintenance of household consumption throughout the pandemic and the very large rise in government expenditure that has created the growth in the economy in recent times.

“Interest rate increases raise the cost of borrowing for both households and businesses. Reductions in household spending have a negative effect on the economy in the short run. Reductions in business investment have a negative effect on the economy in the long run.

“Little wonder that the GfK Consumer Confidence index is now -38, the second-lowest reading since records began almost 50 years ago, and the Institute of Directors’ economic confidence index fell from -4 in February to -36 in April.”