It will be terribly painful for those of us with mortgages but the Bank of England has done the right thing. Interest rates in the UK are now 5.75%; and they will almost certainly hit 6% before the end of the year. The real question is why the Bank didn’t act any sooner.
Inflation has remained far too high for too long: the broadest measure, the retail price index, shows that prices are up 4.3% over the past year. For many people, especially middle class consumers with children and who live in big cities, the real rate of inflation is far higher, as Martin pointed out recently.
Even on Gordon Brown’s debased measure of inflation, the consumer price index, Britain’s record is poor compared to that of other large European countries. CPI inflation is 2.5% in Britain, against just 1.1% in France, 1.9% in Germany, 1.6% in Italy and 1.9% for the euro zone.
The trouble is that we relied on imported deflation from Asian economies to keep our inflation rate down to a much greater extent than most other countries – and now this effect is beginning to wind down. For the first time in years, the price of manufactured goods has started to go up, rather than fall. At the same time, the British economy remains flooded with money and credit, propping up demand and putting added pressure on prices.
So rather than criticising Mervyn King, the Bank’s Governor, for tightening the screws and endangering house prices, as some commentators are already doing, we should be chiding him for his timidity in not moving faster and more boldly.