Five continuous quarters of recession. Inflation peaking at 13%, and still at 9% this time next year. Mortgage rates up.
All in all, a picture of utter gloom from the Bank of England, yesterday. And if you’re thinking “well, that’s England and its Brexit, we’re fine”, well, I wouldn’t get too far out on that ledge, if I was you:
NEW: 🚨
*Bank of England raises interest rates by 0.5% to 1.75%, biggest rise in 25 years,
*as it predicts an even higher peak in inflation of 13 (THIRTEEN) %🚨 Bank predicts recession starting this year lasting as long as financial crisis (5 quarters), as deep as 1990s
— Faisal Islam (@faisalislam) August 4, 2022
Some months ago, I wrote on these pages that there is only one known cure for inflation: A recession. The reasons for that are very simple, even if you’ve never studied economics. Inflation is caused by too much money chasing too few goods. When more people want to buy bread than there are loaves of bread available, the price of bread will rise. To bring the price back down, you must either reduce the demand for bread, or increase the supply of bread.
But increasing the supply of bread – or anything else – takes time. You need to build more ovens, hire more workers, buy more supply vans, and so on. And even then, it won’t help you if the shortage of bread is really – say for example – a shortage of grain from Ukraine. It is much easier, and faster, to just reduce the demand for bread. When you put up interest rates, as the Bank of England has done here, you take money out of circulation, because more people will save and fewer people will borrow.
All of this is why every major inflation shock in modern economic history has ended in recession. So, if you are looking at England and comforting yourself with the idea that this has something to do with Brexit, then I’m afraid it’s time to wake up. The exact same thing will happen in Ireland, inevitably. The only question is when the European Central Bank will decide to follow suit.
But of course, the ECB is not likely to set interest rates in the best interests of the Irish economy. It has a mandate to look at Europe as a whole. It will be much more concerned about the correct interest rate for Germany and France than it will be for the correct interest rate in Ireland. Ever since we joined the Euro, Irish Interest rates are not set for the good of the Irish economy, but for that of the Germans. That is something that media outlets don’t like to talk about, lest it give rise to Euroscepticism, but it remains a simple statement of fact.
The problem for Ireland is that not having control over its own interest rates means that we cannot, in effect, manage the timing of our own recession. If we had control over our own rates, arguably Irish interest rates would already be much closer to the UK’s 1.75% than the ECB’s 0.00%. That leaves us vulnerable to two problems: First, rates may not rise fast enough to combat inflation in Ireland, which could soon see that problem getting far worse than it already is. Second, rates may rise at a time when inflation is easing in Ireland, tilting us into recession unnecessarily. The Irish Central Bank, effectively, is captain of a ship where the steering wheel is being controlled by someone on another continent, remotely.
This is all a catastrophic failure of EU policy: People forget this, but the EU has all sorts of budgetary rules that were explicitly designed to avoid inflation. People might remember voting, in 2011, in the EU fiscal compact referendum: That was designed to limit the spending and borrowing of each member state in order to avoid financial crises, and inflation. The European Central Bank itself was established with the remit of keeping inflation below 2%. Safe to say, on that score, it has failed utterly.
Again, all of this is very dangerous territory, in Irish politics: It is considered almost sacrilegious in Ireland to criticise the Euro, let alone the European Union, and heresy itself to question the wisdom of our membership of the single currency. “Sure you can spend it anywhere, even in Greece!”
But of course, the very things that attracted people to a single currency in the first place are now barely relevant: Banking is so electronic these days that you can go to the UK and spend pounds using your Irish card and barely notice. We shop across borders all the time, with the USA, and China, and other countries, and don’t pay too much heed to the currency differences. In the meantime, we’re still saddled with the downside: We can’t control our own interest rates.
Here’s a final secret, and, again, this is something we’re not supposed to say out loud: The Irish economy is much more like the British Economy than it is like the German or the French. We have closer relationships with it, too. When the British sneeze, we are likely to catch a cold.
The only difference is that unlike the British, we don’t have access to our own medicine cupboard.