I had a really interesting chat with Hamish Baillie, co-manager of Ruffer Investment Company (RICA), last week. He told me that in the context of inflation the most important thing we will look back on from the coronavirus pandemic response will be the passing of the stimulus baton from central banks to governments.
After the global financial crisis in 2008, it was down to central banks to lower interest rates to stimulate economic growth. In response to Covid-19, it was government policy and fiscal channels that took over to support the economy. Baillie thinks that many of these measures, although designed to be temporary, will prove to be permanent, and cites economist Milton Friedman's observation that “there’s nothing so permanent as a temporary government scheme”.
Clearly there is a political imperative to keep the cost of borrowing down. It was striking that chancellor Rishi Sunak opened his Budget speech last week with some stark statistics: the UK’s public finances are twice as sensitive to changes in interest rates as they were before the pandemic, and a 1 per cent increase in inflation and interest rates would cost around £23bn.