With the economy faltering, rates may already be too high

THE Bank of England has a crunch decision tomorrow. If it hikes interest rates again in response to high but falling inflation, it risks making a mistake that could damage the economy.

- James Lynch

The nature of the inflation shock over the past two years meant that the rising policy rate was always going to have a delayed effect on restraining price rises - but we may soon find ourselves in the inverse situation, where reducing rates does not work fast enough to stimulate the economy when needed.

Inflation is still too high, certainly, but this will normalise over the coming months as the effects of recent energy and food prices work their way through.

This could leave the bank rate looking uncomfortably high.

Post GFC and pre-pandemic, there were structural reasons inflation was low, and monetary policy - a cyclical tool tried to combat this.

All major central banks tried to stick to their remit of reaching 2% inflation by reducing interest rates in order to stimulate the economy. This basically didn't work.

Inflation stayed low due to the importing of cheaper goods from China, low commodity prices, online price discovery, and a labour force accustomed to low wage growth, even as corporate margins increased. There was not much monetary policy could do about it.