Economists yesterday blamed the Bank of England’s money-printing spree for fuelling double-digit inflation – as Britain faces another painful interest rate hike to try to bring it back down.
The Bank pumped £450billion into the economy to help steer Britain through the pandemic but experts told MPs that helped to create the price spiral that it is now battling contain.
Inflation has been above 10 per cent since last summer and new figures today from the ONS revealed it stubbornly remains there at 10.1 per cent.
This bolsters the case of economists who say more interest rate rises are likely to be needed before the battle against it is won.
Inflation has been in doubl digits since last summer and new figures from the ONS revealed it stubbornly stayed there in March at 10.1%
Official data published yesterday showing stronger than expected growth in wages, of 6.6 per cent, added to market expectations that rates will rise by 0.25 per cent to 4.5 per cent next month.
Andrew Sentance, a former Bank of England rate-setter, meanwhile told MPs that the Bank’s long period of money printing, or quantitative easing (QE) policy, and low interest rates had ‘quite significantly contributed to the inflation we’re now experiencing’.
The Bank’s QE spree in 2020 and 2021 saw it create money electronically to buy bonds.
It added to earlier QE stimulus dating back to the financial crisis in 2009, taking the total amount of asset purchases under the scheme to a peak of £895bn – a sum which the Bank has only in recent months begun to unwind.
Sentance told the Commons Treasury committee: ‘It did seem that the QE went on for too long. There was too much of it in the pandemic period.
‘We had a more than doubling of the amount of QE during the pandemic and it wasn’t clear that that was the appropriate policy at all.’
Sentance said that had added to the ‘long period of extremely low interest rates and further injections of QE’ in the wake of the financial crisis.
‘That all I think has contributed over a period of time to the inflationary pressures that we’re now seeing,’ he added.
Inflation: UK inflation remains above the 10% mark, the ONS said today
High prices: Food prices continue to rise, the ONS said today in its latest update
Gerard Lyons, chief economic strategist at Netwealth and a former advisor to Boris Johnson, said: ‘I do think it embedded inflationary pressures and I thought it was the wrong approach to take.’
Katharine Neiss, chief European economist at PGIM fixed income, told MPs: ‘QE is designed… to ease financial conditions, support the real economy and therefore push up on inflation.
‘And it has undoubtedly contributed to the inflation that we have seen over the last several years.
‘But there are a lot of other things going on, not least higher energy prices.’
Jeremy Hunt (pictured yesterday) has paraded forecasts by the Office for Budget Responsibility (OBR) that inflation will fall to 2.9 per cent by the end of this year
Fuel costs: Motor fuel prices were lower in March 2023 than in March 2022, the ONS said
Inflation: At 10.1%, UK inflation remains well above the Government’s 2% target
The comments are the latest evidence to suggest that the Bank’s own policies are themselves partly to blame for Britain’s prolonged cost of living squeeze.
Now, it is inflicting further pain by hiking interest rates to try to bring inflation down.
Read more: When will interest rates fall?
Interest rates have been hiked to combat inflation and the expectation is that the base rate could rise one more time to peak at 4.5 per cent.
But the big question now is when will rates fall and how fast?
We look at the latest forecasts and analysis.
> READ MORE: When will interest rates fall?
Bank rate has risen sharply from 0.1 per cent in December to 4.25 per cent today, hurting millions of homeowners as mortgage rates rise and business borrowers, as their loan costs go up.
Spiralling prices and higher borrowing costs were among the factors blamed for a sharp rise in companies going bust last month.
Government figures published yesterday showed there were 2,457 company insolvencies in March, up 38 per cent on the month before and the highest level on records going back to the start of 2019.
Elsewhere, the picture painted by employment and wages data published by the Office for National Statistics (ONS) was more mixed.
The healthy-looking increase of 6.6 per cent in average earnings – in the three months to February – was lower than inflation, so in real terms represented a pay cut.
There was a big boost in overall employment numbers – which rose by 169,000, much better than the 50,000 expected by economists.
That was helped by a sharp fall in the troubling level of economic inactivity – people out of work and not looking for a job – which was mainly driven by young people.
Unemployment edged up from 3.7 per cent to 3.8 per cent though remains at historically low levels.
The number of job vacancies fell for the ninth month in a row – another possible sign of the jobs market cooling.
However, the number of vacancies, at 1.1 million, remains much higher than in recent years.
The figures will be closely monitored by the Bank of England ahead of its next interest rate decision in May.
Rate-setters may worry that signs of higher wages will cause a spiral of rising prices to become entrenched in the economy.
After the latest employment data, financial markets were betting on an 80 per cent chance of a quarter percentage point rate hike in May, to 4.5 per cent.
And traders also mostly think the Bank will go further and increase Bank rate to 4.75 per cent the following month.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.