Donald Trump’s tariffs – and the retaliation by China and other nations – seem set to push up global inflation, hence the crashing of stock markets around the world. This is bad for people’s living standards and once again puts the fragility of the UK economy and our public finances in the spotlight.
The OBR had already halved its growth forecast for this year, but with share prices tumbling after Trump’s tariff wars, both business investment and consumer spending is likely to fall – especially if, as anticipated, prices rise in response.
Seeking to control Trump or even mitigate him is likely to prove fruitless and painful, driven as he is by his America First chauvinism, so the most important thing the UK Government and Bank of England can do is take action to minimise the damage to our economy and living standards.
The Bank of England’s base rate remains high at 4.25 per cent, but the consensus was that will modestly reduce over the rest of the year. But with inflation now expected to rise more sharply, the Bank could be tempted to increase rates to meet its 2 per cent inflation target. That would be a mistake that could tip an already fragile economy into recession.
The UK has already faced an inflation shock recently – and it gave an object lesson in how not to respond.
Post-Covid there was a global rise in inflation as societies unlocked and production took a while to meet renewed demand. There was also, as economists like Isabella Weber pointed out, a wave of profiteering as corporations sought to rebuild their balance sheets.
The Government did a poor job of dealing with this: allowing the energy price cap to rocket, forcing consumers rather than profiteering companies to pay the price. It did nothing as mortgages and rents spiralled and allowed food price inflation to soar (disproportionately hitting the poorest) even though supermarket profits remained buoyant.
The Bank of England responded to the post-Covid inflation rise by hiking interest rates – further damaging consumer finances by increasing the cost of mortgages and personal debt. Despite weak consumer demand and low growth, the Bank of England was bullish on increasing interest rates in 2022, with Governor Andrew Bailey saying “inflationary pressures will require a stronger response” and he “will not hesitate to raise interest rates”. And he was true to his word, raising interest rates from 2.25 per cent to 5.25 per cent, sending the economy into recession at the end of 2023.
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Read MorePushing up interest rates took demand out of an already weak economy, hiked mortgage costs for millions of people, meaning they had less to spend in the real economy. Poverty rose, while banks recorded their best ever year for profits.
Both the Bank of England and our Government must not make the same mistake again. The coming likely bout of inflation will also be due to external factors (as it was post-Covid), that cannot be influenced by domestic interest rates.
Post-Covid inflation didn’t come down until a year after the Bank increased interest rates – and that was arguably down to the reduction in energy costs.
Raising interest rates at this time, with weak consumer demand and low growth, risks sending the UK economy into recession again. Those moving in monetary policy circles seem confident that instead of raising interest rates the Bank is instead likely to accelerate interest rate cuts, as The i Paper’s Grace Gausden recently reported.
This is welcome news, but if the Bank of England does the opposite and starts making the same mistakes again, Starmer and Reeves must think the unthinkable and end the Bank of England’s independence.
When Starmer talks about the world having changed, he is right, and it might be time to reverse Bank of England independence which was designed for the era of globalisation. In a volatile global economic climate, governments need to be agile, with all the levers readily at their disposal. The UK cannot afford more failure from Threadneedle Street.
Andrew Fisher is a former executive director of policy for the Labour Party
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