We are now paying the price for years of cheap money, says ROSS CLARK | Express a comment | Comment


It is true that the Monetary Policy Committee (MPC) has never raised rates more than 0.25% at once in its 25 years of existence. But the Bank’s current base rate of 1.75% is still surprisingly low by historical standards. Until the 2009 crisis, the base rate had never fallen below 2% in over 300 years.

The last time we had inflation as high as it is today (11% on the old retail price index) was in 1982.

The base price then? A shocking 14 percent. It’s the harsh medicine administered to kill the inflation dragon of the 1970s and 1980s.

At the time, this caused immense pain to homebuyers and businesses, and was condemned by many as the “evil” policy of “monetarism”.

But it worked. High interest rates in Britain and the United States brought inflation under control.

While monetarism helped deepen the recession of the early 1980s, it also contributed to the golden age of relatively stable economic conditions that began in the mid-1990s.

Could we need such drastic medicine again? Yesterday the Bank admitted that its previous inflation forecasts were hopelessly wrong.

A year ago, he presented us with charts showing that the consumer price index (CPI) peaked this year at 2% – the target set by the government.

In its quarterly monetary policy report yesterday, it forecast the CPI to peak at 13% in October – the month in which Ofgem revises its energy price cap.

The inability to forecast the inflationary surge is a shocking error on the part of the Bank.

Indeed, you wonder why Governor Andrew Bailey is not under pressure to resign.

But the failure of monetary policy did not start with him. Interest rates have been contained for too long.

When they were set at 0.5% in early 2009, we were told it was an emergency measure to support the economy in what was then the deepest recession in nearly of a century.

Yet the economy recovered, house prices started to rise, unemployment fell to its lowest level in less than 40 years – and the Bank kept rates at the emergency level of 0 .5%.

At the same time, the Bank continued its policy of quantitative easing – a polite name for printing money.

In defense of the Bank, it was not the only one.

The European Central Bank and the US Federal Reserve have done much the same. But why has no one learned the lessons of history?

Printing money has been associated with runaway inflation long before 1920s Germany was brought to its knees by hyperinflation.

More recently, Robert Mugabe showed the horrific consequences of turning on printing presses in Zimbabwe.

In Britain, we got away with quantitative easing and extremely low interest rates for several years because at first inflation was only evident in asset prices.

Stock and house prices galloped in value. However, it was quite inevitable that inflation would one day affect consumer prices.

You cannot create money out of thin air and expect it to have no serious consequences.

The problem is that the government liked ultra-low interest rates because it kept the cost of servicing its huge debts low.

Low interest rates also helped ordinary borrowers. People who spent like there was no tomorrow, maxing out their credit cards, were effectively bailed out.

But for savers, the years of ultra-low interest rates have been disastrous. Put some money aside and the real value of your savings is currently being eroded by almost 10% per year.

The policy should have encouraged caution with money and discouraged recklessness.

It was, after all, excessive borrowing that caused the 2008/09 financial crisis in the first place.

Hopefully interest rates won’t have to approach 14% this time.

This would bankrupt businesses and lead to a wave of home foreclosures.

But there is no doubt that rates will rise significantly above 1.75%.

The Bank simply has to fulfill its mission of controlling inflation or else risk the kind of spiral we experienced in the 1970s. And please never go back to the world of Alice in Wonderland in which we We’ve lived for most of the past 12 years where borrowing money was virtually free and it was impossible to protect your savings against inflation.

Savvy savers deserve more than to have their savings plundered to pay the debts of others.

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