Why the Bank of England was wrong to raise interest rates

When Silicon Valley Bank got into difficulty, it became apparent that, for various technical reasons, the torrent of interest rate increases over the last year were putting a strain on the US banking system. Credit Suisse was a different story, but its troubles sent stock markets around the world into a panic which prompted the Swiss authorities to pressgang UBS into an unwanted merger.

The overall turmoil in the banking sector led many economists and analysts to think that central banks would pause rate rises, but that was not to be. The Federal Reserve in the US put up interest rates by a further 0.25 percentage points yesterday and the Bank of England has taken the same path today.

I suppose that it is some consolation that the rises were 0.25 rather than 0.5 as originally expected. This is an indication that central banks are having to walk a tightrope between needing to control inflation and ensuring the health of the banking sector.

When any bank collapses, there is a risk of contagion as trust and confidence among depositors is a vital component of a well-functioning banking system. The actions of regulators over the past couple of weeks seem to have calmed the waters for the time being, but there is still a risk that the scare deepens to a crisis.

As far as inflation is concerned in the UK, this week's figure from the Office for National Statistics was 0.3 per cent higher than last month's figure when it had been expected to decline by 0.2 per cent. This meant that the Bank of England really had no choice other than to raise interest rates again. However, we should remember that many mortgages are on fixed rates and the full impact of the rise to four per cent has not been felt yet. And now the base rate is at 4.25 per cent, increasing the likely shock when fixed terms come to an end. When combined with high energy costs and increases coming through on everything from broadband to pasta, this is going to have a very marked effect on the British consumer.

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In his Budget a few days ago, Jeremy Hunt told the public that the Office for Budget Responsibility believed that recession would be avoided this year, although GDP would decline by 0.2 per cent. The technical definition of a recession is two quarters of negative growth. There is a risk that with core inflation rising, spurred on by wage increases, the Bank of England will raise rates further in the near term, making a recession more likely.

One of the big problems is that, as higher mortgage costs hit, there will be even more pressure from workers on employers to increase wages, perpetuating the inflation cycle. And inflation with negative growth is not a good place to be.

The Conservative Party continues to have internal debates about how to generate economic growth. There is no doubt that in the current environment, it is difficult to see how this might be achieved. The Treasury needs to focus on how it can encourage companies to invest, and government needs to fund infrastructure projects. Not the ones that take 30 years to come to fruition, but the building of new hospitals and schools, which is badly needed in any event.

The economic future for Britain looks pretty bleak currently. I don't envy the members of the Monetary Policy Committee at the Bank of England and, on balance, I suppose they had no choice other than to raise rates today. However, I strongly feel that they need to take stock before their next meeting and remember that fixed rate mortgages will soon start coming to an end creating a further and unwelcome financial burden for millions of borrowers.

Nicola Horlick is the chief executive of Money&Co