It turns out there is nothing like getting your homework marked by a tough new teacher to make everyone concentrate a little harder. Over the last couple of weeks of her campaign to lead the Conservative party, Liz Truss has made one point again and again. The Bank of England has been far too relaxed about inflation. And, surprise surprise, it has suddenly got a lot tougher.
Today the Bank raised interest rates by half a percentage point, the largest single move in almost thirty years. Rates are now at the highest level in almost two decades. There was no great mystery about why. Inflation is already running at 9 per cent and, shockingly, the Bank predicted today that it would hit 13 per cent before it peaked. Optimistic forecasts that rising prices were merely temporary, triggered by the war in Ukraine, and would soon be back under control, have been blown away. It is now clear that, along with much of the rest of the developed world, the UK has a serious inflationary problem.
Arguably the Bank should have been more decisive. A one percentage point rate rise today would have sent the clearest possible message that it was determined to bring inflation back under control even at the risk of tipping the economy into a recession.
Even so, a half point, accompanied by the winding up of quantitive easing, is still the clearest signal it has yet since. It is hard to avoid the conclusion that Truss’s criticisms have had an impact.