Blimey.

The Bank of England was always going to increase its Bank rate this month. But every economist had expected only a quarter percentage point increase.

There was good reason for this.

Although inflation data had been higher than expected this week, the bank had been slowing down the rate at which it was lifting borrowing costs. So too had its counterpart central banks around the world, most notably the Federal Reserve in the US and the European Central Bank.

Typically a quarter percentage point increase is considered a “normal” increase. And while some investors had begun to bet on a bigger rate increase this month, most people expected another normal increase.

Be the first to get Breaking News

Install the Sky News app for free

Well, the bank’s monetary policy committee (MPC) has surprised them with a bigger increase.

It’s a sign, if any were needed, of just how worried it is about inflation, which looks like it is becoming dangerously sticky.

The stickier it gets, the harder inflation is to bring down, hence why the bank is taking this more radical step.

It is a form of shock therapy that it hopes will send out a clear message: when it comes to inflation-fighting, it’s not messing around.

The problem is that some will depict it as a form of panic.

The bank has been roundly criticised for failing to forecast the sharp increase in inflation in the last couple of years. It has been criticised for being too slow to respond. Now it is responding far more quickly, but some will argue that this is a problem of its own making.

Please use Chrome browser for a more accessible video player

And an increase like this will have a bearing on households. For as economic tools go, interest rates are a particularly blunt instrument.

Cutting them encourages all sorts of economic activity – some good, some bad. It incentivises people to borrow more, sometimes to excess. But it also encourages investment in important parts of the economy.

Indeed, you could make the case that the pretty pass we’re in at the moment, with so many households so sensitive to even a relatively small increase in rates – with the upshot that 6% mortgage rates actually feel a lot like 15% rates did in the early 1990s.

Please use Chrome browser for a more accessible video player

In much the same way, raising interest rates is a little like bludgeoning the economy. It helps to reduce inflation, by making it considerably less attractive to borrow and splurge. But by the same token it also causes severe damage to many households. It creates collateral damage.

Read more:
The solution to bringing down inflation is a political nightmare for the Tories
Mortgage misery: What is causing the crunch, will it get worse and what can you do if you are struggling?
‘Eyewatering’ hit to 1.4 million, mainly young, mortgage customers ahead, IFS warns

That is the dilemma facing the Bank of England right now. It knows that this will be grisly. It knows many blameless households who were simply following the best mainstream advice of the time will suffer a serious financial blow as mortgage rates rise.

Yet since its main task is to try to reduce inflation and get it down from its current 8.7% level to its target of 2%, it feels duty-bound to wield the bludgeon.

Related posts:

Legal limit for contactless payments to increase, chancellor says ahead of budget announcement Pest control giant looms as Rentokil agrees takeover of US rival in £5bn deal IMF tells UK to be ready to redeploy furlough if ‘widespread’ closures needed to tackle pandemic Motor Fuel Group owners jumpstart £5bn sale of petrol retail giant CVC Capital lines up veteran Lucas to spearhead $15bn stock market float Sharp rate rise by European Central Bank may force Bank of England to follow suit HSBC customers unable to pay for meals and shopping during online banking outage Egg shortages ‘could just be the start’ as UK is ‘sleepwalking’ into food supply crisis, farmers union warns Shapps unveils compensation scheme for postmasters who helped expose Post Office scandal Credit Suisse fails to rule out redundancies but tells staff their bonuses are safe Business insolvencies at post-pandemic high as higher rates add to inflation pain Food prices will remain stubbornly high for a while but there is good news on inflation ahead