Central banks fall far behind the curve on inflation
The Bank of England may have raised interest rates and the US Federal Reserve is tightening policy too, but with inflation soaring, is it too little too late?

“Surprise, surprise!”, says Ipek Ozkardeskaya of Swissquote. Last month the Bank of England failed to raise interest rates despite market bets that it would. This month it has pulled the reverse trick, becoming the first big central bank to raise the cost of borrowing. The 0.15 percentage point rise to 0.25% came despite market bets that Omicron-related uncertainty would cause the Bank to keep policy steady. With inflation at an annual rate of 5.1% and predicted to hit 6% next April, the Bank decided it didn’t have the luxury of waiting for more clarity about Omicron.
Fighting for credibility
The interest rate rise is so “marginal” that it is “frankly… unlikely to make much of a difference”, says Jeremy Warner in The Daily Telegraph. All the same, it is an important signal of intent. After a year spent making increasingly unconvincing excuses for soaring inflation, Threadneedle Street needed to head off speculation that its real objective is to keep government borrowing costs low. The Bank has now shown that “it won’t back excessive spending forever”.
Even those of us who have long supported tighter policy must admit that “this was not a great time” to start raising rates, says David Smith in The Sunday Times. UK “growth was stagnating even before Omicron” and inflation has surged, suggesting a “touch of… stagflation”. The service sector is having a nightmare before Christmas. “By raising rates at a difficult time”, the Bank has at least “won back” some of its lost credibility as a central bank that takes inflation seriously.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
“Omicron or no Omicron”, the Bank had no choice but to raise interest rates, says Liam Halligan in The Daily Telegraph. Inflation is more than two times the 2% target. November’s rate-rise-that-wasn’t debacle had raised serious questions about Threadneedle Street’s willingness to both raise the Treasury’s borrowing costs and to upset market traders, who love easy money. Credibility is “a must-have for any effective central bank”: if businesses and consumers come to believe that authorities will never act against inflation then it will become “a self-fulfilling prophecy”.
Fed turns hawkish
The US Federal Reserve is also in tightening mode. It says it will reduce its monthly asset purchases twice as fast as previously planned. That leaves the Fed on course to wind up its quantitative-easing programme (whereby it buys bonds with printed money) and start raising US interest rates next spring. The Fed’s latest projections show it plans to raise interest rates up to three times during 2022.
For all the fanfare about its newfound hawkishness, “the Fed has effectively committed not to raise rates above 1% in 2022”, says Philip Pilkington on Unherd. Yet annual US inflation is 6.8%. “I do not envy the job of central bankers these days.” Policymakers are stuck between the rock of raising rates sharply, which will cause a market crash, and the hard place of doing nothing, which will let inflation rip. The Fed’s solution? “Magically assuming in their projections that inflation will disappear” by itself.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
Green mortgages: how do they work and how much can you save?
Most high-street lenders now offer some kind of green mortgage deal. We look at who’s eligible, how to apply and the mortgage rates and cashback on offer
-
Rachel Reeves urged to avoid pension tax relief raid or risk ‘Omnishambles Budget’
It might seem like low-hanging fruit, but cutting pension tax relief would be a dangerous move for the chancellor, says former pensions minister Steve Webb
-
'Britain is on the road to nowhere under Labour'
Opinion Britain's economy will shake off its torpor and grow robustly, but not under Keir Starmer's leadership, says Max King
-
What are wealth taxes and would they work in Britain?
The Treasury is short of cash and mulling over how it can get its hands on more money to plug the gap. Could wealth taxes do the trick?
-
UK bank stocks are no bargain – here's a safer alternative
Opinion Britain's banking sector faces severe political risks. Switch into this global financials trust instead, says Max King
-
Three small companies with big potential
Opinion Nish Patel, portfolio manager of The Global Smaller Companies Trust, picks three small companies where he'd put his money
-
Automatic Data Processing is making big profits from organising offices – should you invest?
Automatic Data Processing has established itself as a one-stop shop for managing the workplace. Is it a sound long-term investment?
-
How multi-asset trusts can help you deal with volatility
Multi-asset trusts help navigate global uncertainty and provide investors with an added layer of protection through diversification
-
When buying bank stocks, think small for the best value
Bankers love to build bloated global empires, but that rarely rewards their investors, says Bruce Packard
-
How to find value in global equity markets
Global equities beyond America’s pricey market are bargains, says Rupert Hargreaves