"And what we’re facing now is that reluctance to accept that, yes, we’re all worse off, and we all have to take our share."
The furore the comment caused was expected in the age of social media and so was the ensuing apology over the choice of words. But this does not diminish the central bank’s determination to justify its mandate and fight inflation.
The only way they can do this is to make money more expensive and scarcer to drive down demand.
The use of words 'drive down demand' is ‘econospeak’ for a process that is outright ferocious.
Interest rates
In its June meeting, the central bank surprised markets by producing a double rate hike. Higher interest rates increase the cost of mortgages. Currently, the interest rate is at 5 per cent – markets expect it will go as high as 6 per cent by 2024.
According to think tank Resolution Foundation, a 6 per cent interest rate would result in a £2,900 increase in average mortgage payments throughout the country, reducing available incomes.
Higher interest rates result in higher savings rates as well, increasing the incentive to save and decreasing the incentive to spend. This would drive down consumption.
Companies with problematic business models that have relied on a decade of cheap money to keep going, will now be faced with severe difficulties in refinancing.
Those businesses will find it hard to raise wages. Some might even have to close doors, forcing unemployment up and relieving the stress in the labour market.
All this means more unemployment, less money for consumption and lower living standards across the board. A recession is quite possible.
Chancellor Jeremy Hunt said on May 26 that he would be comfortable with a recession triggered by the BoE if that is what it takes to break inflation and return to growth.
When all is said and done, the inflation cycle will not break itself. Policymakers are gearing up for a war on prices. An inflation fight comes at a great cost. It requires swift and decisive action and involves a good deal of economic pain.
Businesses and consumers should prepare for one of the most difficult economic years in living memory.
George Lagarias is chief economist at Mazars
