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22 March 2023

Inflation is running rings around Jeremy Hunt

The Chancellor is caught between a banking crisis and a cost-of-living crisis.

By Will Dunn

The aggressive optimism of Jeremy Hunt’s Budget speech has come into abrupt contact with reality. Inflation – which the Chancellor said last week would fall dramatically, thanks not only to the actions of the Bank of England but to “additional measures I take today” – rose again to 10.4 per cent (as measured by the consumer price index, or CPI) in February.

CPI was thought to have peaked in October at just over 11 per cent and was widely predicted to fall under 10 per cent, from 10.1 per cent in January. Yet despite rising interest rates it has increased again, according to Office for National Statistics figures published this morning (22 March), driven among other things by the rising cost of food and clothing. Food prices are now rising at their fastest rate for 45 years. “Core” inflation – which the ONS defines as the part of the measurement “that is expected to persist into the medium or longer term” – also rose from 5.8 per cent to 6.2 per cent.

This would be concerning enough if it did not come on the heels of a banking crisis, the principal cause of which was the rapid hiking of interest rates to control inflation. This puts the Bank in a very difficult position. Hunt told the House of Lords Economic Affairs Committee yesterday that his message to the Bank’s governor, Andrew Bailey, was “do what you think is necessary” to control inflation. “We need to keep our foot on the accelerator,” he told peers. 

Tomorrow the Bank’s Monetary Policy Committee will meet to decide whether to raise interest rates for the eleventh time in a row. Around the time of Hunt’s Budget speech, the prediction of investors in financial markets (as measured by the pricing of securities related to interest rates) was that there was a 90 per cent chance that rate rises would continue, but by the end of last week, that had fallen to 50 per cent.

In the Lords committee Hunt also responded to Norman Blackwell, the former chairman of Lloyds Banking Group, that the “root cause” of the banking crisis that developed around the failure of Silicon Valley Bank (SVB) was the scale and speed at which central banks have been forced to respond to rising inflation. The SVB crisis threatened to push hundreds of British technology companies into insolvency, but it was the wider risk of contagion that most concerned governments, as $459bn was wiped from the market value of the global banking sector and other banks began to come under stress. Credit Suisse, one of the largest banks in Europe with assets of over €700bn, became the first institution designated “global systemically important” to need a bailout since 2008, before it was acquired on Monday by the investment bank UBS. Were a significant financial crisis to develop, there is a high chance it would create recessions in a number of countries in an already uncertain global economy.

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The Bank of England is therefore caught between the two main imperatives of its charter, which are to control inflation and ensure financial stability. What if it can’t do one without endangering the other?

It doesn’t help that the government is in some ways avoiding the issue or pulling in the other direction. Food prices are not just being driven up by the cost of energy but by the unchecked greed of companies that see it as a chance to gouge consumers for some extra profit, but while the government is happy to intervene in financial markets it seems less interested in setting the price of ketchup. Hunt is also working on a programme of financial deregualtion, the “Edinburgh Reforms”, which he said yesterday will “not unlearn the lessons of 2008” but which are expected to remove some of the safeguards that were put in place at that time, which may well have implications for financial stability.

The Bank, then, is caught not only between inflation and stability but between the priorities of a government that will blame it if inflation rises and take the credit if inflation falls.

[See also: Who killed Silicon Valley Bank?]

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