But while I like the idea of a “moron” premium, there may also be a more concrete concern. I’ve been in correspondence with other City of London economists, and they have expressed doubts about whether the bank will actually be willing to tighten enough to offset the inflationary impact of Trussonomics.
These doubts were reinforced on Monday, when the bank disappointed investors hoping for an emergency rate hike to stabilize the pound, limiting itself instead to a rather vague statement that it “would not hesitate” to raise rates if necessary to limit inflation.
Yet I don’t see any reason to believe that Britain’s central bank has lost its political independence, or that it will allow itself to be bullied into avoiding rate hikes by a government that apparently believes in the zombie idea that tax cuts will pay for themselves.
There may, however, be a Britain-specific reason the Bank of England might be hesitant to raise rates sufficiently to contain inflation.
The more I look at current events in Britain, the more I find myself harking back not to 1976 but to the other sterling crisis of 1992. At the time, while the euro didn’t yet exist, many European nations, Britain included, were part of a system intended to keep the relative value of their currencies stable — a so-called exchange rate mechanism. In 1992-3, however, the European E.R.M. came under severe pressure from speculators, most famously George Soros, who began betting that many of Europe’s economies would give up on their targets and allow their currencies to fall against the Deutsche mark.
Defending against this speculative onslaught would have required sharply raising interest rates for an extended period. And in the end, several countries, Britain included, proved unwilling to do that. Why?
Part of the answer was that Britain was suffering from high unemployment at the time, and feared that rate hikes would deepen its slump. But there was another, perhaps even more pressing, concern. For a variety of reasons British homeowners, unlike their U.S. counterparts, tend to have either floating rate mortgages, whose interest rates vary with the market, or mortgages that will come due and need to be refinanced within a few years.