Past recessions are not a guide to the future

US unemployment still low

Interest rates in the UK now stand at 1.75%, after this month’s 0.5% increase. Investors might be forgiven for feeling confused.

The Bank of England says it now expects UK GDP to fall for five consecutive quarters yet still chose to choke off economic activity by making borrowing more expensive. Traditionally, central banks cut interest rates when they foresee gloom. That they opted instead to raise them in the face of such a bleak outlook indicates the importance they attach to putting a lid on any feedback loop between wages and prices (where each drives the other higher and higher). Capital Economics expects the Bank of England will need to keep increasing the rate until it reaches 3% to achieve the effectiv...