Bank of England's rate increase is dangerous for the economy, expert claims

The Bank of England has increased the base rate for the 11th consecutive time

Bank of England's rate increase is dangerous for the economy, expert claims

The Bank of England increased interest rates for the 11th consecutive time this month, with the base rate reaching 4.25%.

The latest Office for National Statistics’ data, published the day before the Monetary Policy Committee’s meeting, showing an unexpected rise, put paid to the hopes of some that the base rate may remain unchanged.

But Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial, said the Bank of England’s policy has been ‘ludicrous’ for several months - he believed it was now dangerous for the economy.

Mather-Holgate (pictured) said: “What the Bank of England has done is batter the demand side of the economy by increasing interest rates whilst higher taxes and energy bills were, in effect, doing that job for them in restricting disposal income.”

Mather-Holgate suggested the effect of this policy was hugely restricted by the simple fact everyone needed to use energy.

“We can point to one global event of 2022 that sent shock waves around the world, the war in Ukraine; this made energy prices spike with fears of a global shortage,” declared Mather-Holgate.

Higher energy prices were not caused by demand in the economy, he said, but by concern of lack of supply.

A relatively mild winter in Europe meant that energy was not in such demand, noted Mather-Holgate, and the world had adapted, which had led to energy prices somewhat reducing.

Mather-Holgate said the extra energy costs filtered through to everything from food to clothes, and inflation had remained high ever since. Inflation was the measure of prices now compared to 12 months ago, so by May, he believed the market would start to see inflation fall - potentually fast.

When the summer came, Mather-Holgate predicted, the UK would see not just falling inflation, but deflation – in comparison to 2022 prices.

“What is more worrying is that the confidence in the economy will have had the life sucked out of it by a year of unnecessarily high interest rates,” he added.

Short sighted

Mather-Holgate believed the hopes of a demand-led stimulation to inject some adrenalin into the high street had been thwarted by short sighted economics.

“Homeowners and businesses have a right to be furious at the policy of the central bank, and Andrew Bailey, governor of the Bank of England, needs to justify the decisions of his Monetary Policy Committee since the invasion of Ukraine,” Mather-Holgate added.

It was Mather-Holgate’s view that it would not be until the summer that it became clear just how damaging these higher rates had been, and he fully expected to have a new governor by the end of the year.

“His resignation will come at a time when the economy does fall into recession, and deflation will compound this lack of growth for the foreseeable future,” he argued.

The good news for those home and business owners who had managed to cling on to their assets, Mather-Holgate said, was that interest rates would be half that of what they are today.

Do you believe the Bank of England have been short sighted in its decision to continue to up the base rate? Let us know in the comment section below.