When the cost of living starts to rise, the Bank of England deploys its secret weapon: raising interest rates. Raise rates, and people are inclined to save more and borrow less – which reduces spending, which reduces demand, which slows price rises. This is why, faced with inflation at a 30-year high, today (3 February) the Bank decided to increase rates by a quarter of a percentage point, to 0.5 per cent.
A quarter of a percentage point hardly seems earth-shattering, considering inflation is at 5.4 per cent and rising at a rate that has bypassed most economists’ expectations in recent months. Last time inflation was this high, in 1992, the interest rate was almost 10 per cent as the Bank of England tried to wrestle it back down. Is there a chance that could happen again?
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