Those hoping that Matt Hancock heading Down Under would mark a turning point in our unremittingly grim headlines look away now. The Bank of England today announced interest rates would rise from 2.25 per cent to 3 per cent. That is the single biggest rate rise since 1989, and takes rates to their highest level since the 2008 financial crisis. Inflation is now expected to peak at 11 per cent, after passing 10 per cent in September.
As painful as this is for borrowers and those facing increasing mortgage costs, it is a necessary and long overdue step in the fight against inflation. Cue the usual guff about the medicine tasting awful but still being necessary. Unfortunately, it came alongside some other painful news from Threadneedle Street. Not only that my arch-nemesis Andrew Bailey remains in place, but that we face a “very challenging” two-year slump: the longest recession since the First World War.
It will not be as deep as the recession that followed 2008. It is expected to see 2.9 per cent knocked off national output, compared to the 6.3 per cent decline back then. This is the slow unfurling of a tightly-wound bandage, rather than the ripping off of a plaster. A recession is also not a wholly bad thing. Lower interest rates since 2008 have created an economy that remains partially in suspended animation. Fewer companies went bust in the recession of 2009-10 than the less severe one of the early 1990s.
As Chris Snowdon has pointed out, this prevents the creative destruction that allows market capitalism to work effectively. If our economy remains in cryo-sleep, we cannot see the resource re-allocation from unproductive businesses to productive ones that drives innovation and renewal. Nevertheless, the process, the transition, the weaning off the cheap-money-fix was always going to be a painful one. Hence why the Bank and the politicians that enable its quasi-independence have put off the choice for so long.
Hopefully – as with the Truss debacle – this recession will punish some political delusions as well as a few economic ones. In the same way we cannot remain at historically low rates forever, nor can we now fail to address the various structural problems in our economy that successive governments have ignored. Our failure to build, our reliance on foreign food and energy, our unequal economic geography, our addiction to cheap foreign labour: let us have an end to our delusions, forged in the white heat of this recession.