ALEX BRUMMER: My fear now is that the Bank of England will keep on squeezing

The spectre of a wage-price spiral is embedded in British economic and political memory – and nowhere more so than in the Bank of England.

During the 1970s, when inflation stood at 25 per cent, James Callaghan’s Labour government had to seek a humiliating loan from the International Monetary Fund.

That grim lesson from recent history helps to explain why the Bank’s governor Andrew Bailey – and his interest-rate- setting monetary policy committee – yesterday raised the cost of borrowing for the 14th consecutive month.

The markets had been expecting the decision but the news still isn’t pretty.

The decision piles yet more pressure on to household budgets, to businesses and to anyone with a loan (though some mortgage providers have said they will not pass on the increase). Indeed, the country could tip into a recession as a direct result.

ALEX BRUMMER: That grim lesson from recent history helps to explain why the Bank’s governor Andrew Bailey (pictured) – and his interest-rate- setting monetary policy committee – yesterday raised the cost of borrowing for the 14th consecutive month

Following yesterday’s 0.25 per cent increase, the base rate now stands at 5.25 per cent: its highest level in 15 years.

And what troubles me further is that worse may be to come: the committee ominously warned yesterday that if inflationary pressures persist, a ‘further tightening in monetary policy will be required’.

Indeed, two committee members were so convinced of the dangers of inflation that they voted for an even bigger rise, to 5.5 per cent. So who was right?

There’s no doubt that wages are increasing and that, if this were to continue unchecked, a dreaded wage-price spiral could be the result, entrenching inflation to dangerous levels as repeated pay-increases chase surging prices. 

In the three months to May, private-sector pay growth surged 7.7 per cent, something the Bank admits it didn’t see coming. But that is hardly surprising, given its woeful recent forecasting record.

Only last week, the Bank’s Court – its supervisory board – called in former Federal Reserve chairman and Nobel prize-winning economist Ben Bernanke to probe what has gone wrong with the Old Lady’s financial modelling.

Having been too optimistic about defeating inflation when price rises began to bite in 2021, the Bank now warns that inflation will still stand at 5 per cent by the end of the year, leaving Rishi Sunak’s promise to halve inflation this year on a knife-edge. (In January, inflation stood at 10.1 per cent.)

The country may have to wait until the second half of 2025, well after the next general election, to hit the Bank’s 2 per cent inflation target – though even that might be ambitious.

This slow progress reflects badly on Bailey’s judgements. He and his colleagues were manifestly too late to recognise that the cost of living was surging after the pandemic. 

They delayed raising rates, with the result that they are inflicting ever-more vicious increases on the public today. I firmly believe they should now hold their fire. The British economy is nowhere near the nadir it reached in the 1970s, and raising rates repeatedly will only cause additional hardship.

The Bank should let its recent increases take their desired effect – and step back in the meantime. The economy is slowing. New data on our services sector – which accounts for more than 70 per cent of national output – shows that activity is weakening, if still in positive territory. Moreover, poor weather in July has hit retail hard.

My greatest worry is that the Bank will overdo the squeeze and deliver misery for us all. Bailey’s timing has been consistently wrong in the past. Now he has the chance to get it right.