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Bank inflation – raising interest rates makes things worse

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Working on the ‘coal face’ as we do, we are seeing an alarming increase in the number of businesses contacting us for advice because they are seriously struggling in this current climate.

Yes, we all know energy costs are forecast to hit record highs over the next year which has a knock on effect across all sectors – as we are seeing already – and yes we know these are inflationary but we are struggling with the actions of the Bank of England raising base rates as they have and will inevitably do so again now that inflation is in double digits.

We are of the opinion that energy and other cost increases are due to extraordinary events (the war in Ukraine being the major one) and not as a result of a booming economy driving demand that needs to be squashed to prevent inflation rising. The problem the Bank and consequently all of us face, is that the Bank are required to act to reduce inflation and their weapon of choice is raising base rates.

We are not economists and so may be missing the point but surely the Bank should look at the current circumstances and accept that raising base rates will make matters worse. Why? You may well ask and our view is that the war in Ukraine is the major catalyst for the spike in energy costs that triggered cost increases across all sectors as businesses looked to maintain margins. Raising base rates just adds fuel to the inflation pressures and creates, as we are seeing right now, demands for wage increases to match (or exceed) inflation. All of this will drive inflation higher just as we are forecast to be heading into a deep recession.

What is the point in breaking peoples household finances by increasing their mortgage and other costs and destroying businesses when the inflation has not been caused by excess demand in the economy? This is where we struggle to understand the Bank.

People are likely burning through savings (on which they have not earnt any interest in the last 10 years) to shore up the monthly household budget. Businesses are struggling and many will not survive which will lead to job losses, further decimating family finances and the wider economy. All of this will inevitably cause a sharp fall in economic activity that, presumably, will result in falling inflation but at what long term cost?

We are also dismayed at the energy companies reporting record profits and we wonder whether the Competition and Markets Authority should be looking at breaking the apparent cartel which, to us as mere IPs contemplating economics, could be playing a part in these record profits.

As always, we welcome opinions of others and we urge every business owner/director that is facing financial difficulties to act decisively and seek independent professional advice before it is too late and that is why we are always available for an initial zero cost assessment which can be arranged by contacting Alistair Dickson.