Blimey.
The Bank of England was always going to increase its Bank rate this month. But every economist had expected only a quarter percentage point increase.
There was good reason for this.
Although inflation data had been higher than expected this week, the bank had been slowing down the rate at which it was lifting borrowing costs. So too had its counterpart central banks around the world, most notably the Federal Reserve in the US and the European Central Bank.
Typically a quarter percentage point increase is considered a “normal” increase. And while some investors had begun to bet on a bigger rate increase this month, most people expected another normal increase.
Well, the bank’s monetary policy committee (MPC) has surprised them with a bigger increase.
It’s a sign, if any were needed, of just how worried it is about inflation, which looks like it is becoming dangerously sticky.
The stickier it gets, the harder inflation is to bring down, hence why the bank is taking this more radical step.
It is a form of shock therapy that it hopes will send out a clear message: when it comes to inflation-fighting, it’s not messing around.
The problem is that some will depict it as a form of panic.
The bank has been roundly criticised for failing to forecast the sharp increase in inflation in the last couple of years. It has been criticised for being too slow to respond. Now it is responding far more quickly, but some will argue that this is a problem of its own making.
Please use Chrome browser for a more accessible video player
What’s keeping inflation so high?
And an increase like this will have a bearing on households. For as economic tools go, interest rates are a particularly blunt instrument.
Cutting
