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Limited damage

Higher interest rates will slightly increase unemployment, and do little to address our fundamental economic problems
Limited damage

The Bank of England has chosen to destroy jobs, because this is the foreseeable effect of its decision to raise interest rates.

This is because higher interest rates reduce inflation largely by depressing demand. At the margin, they raise the cost of capital and thus deter companies from investing and expanding. And in raising borrowing costs they also (again at the margin) deter customers from borrowing and spending and encourage them to save. The upshot is that they reduce demand and therefore employment.

Granted, these effects are small. The Bank’s own research estimates that a quarter-point rise in Bank rate eventually cuts output by less than 0.2 per cent, implying a loss of less than 50,000 jobs which is less than the sampling error in estimates of employment. Most of the rise in unemployment the Bank expects in coming months will come from the slowdown that would happen anyway, rather than from its own actions. However, with the Bank warning that “some degree of further tightening in monetary policy may still be appropriate in the coming months” it will add to the harm of that slowdown. For some people the Bank is going to make the cost of living crisis much worse.

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