THE Bank of England is expected to raise its interest rate to the highest level since 2009 tomorrow.

Its monetary policy committee (MPC), which sets the bank’s interest rate, will do this in the belief that it is necessary to bring inflation back down to more manageable levels.

They will be wrong to do so. The most likely outcome from rising interest rates is that any impact on inflation will be minimal, but by making borrowing more expensive the risk of a recession will be much increased. It is based on a serious misunderstanding of the kind of inflation we face today.

Former MPC member Adam Posen has made the flawed logic of the bank’s thinking painfully clear, arguing that the bank was “duty bound” to cause a recession in order to fight inflation.

This sounds a little crazy — how can anyone working for the Bank of England want people to lose their jobs? — but the theory here is straight out of the mainstream economic textbooks.

It says that inflation happens when people have too much money that they try and spend, relative to the amount of goods and services available.

By raising the interest rate it charges other banks for their borrowing, the Bank of England hopes to make all borrowing more expensive, and so restrain spending by people and by businesses.

But if everyone’s spending falls, then the danger is the whole economy can fall into a recession.

Posen and other economists argue that this is a price worth paying to hold back inflation.

Allied to this theory is the belief that wage rises help push prices up, which Posen also claims.

Bank of England governor Andrew Bailey recently expressed the same view when he suggested workers should practice pay “restraint” to slow down inflation.

The thinking here is that if prices rise, workers will demand higher pay, causing prices to rise further. Therefore, workers should be paid less to hold prices down. 

Once upon a time, when Britain had much stronger unions and workers were able to bargain for higher wages, like in the 1970s, this story might — possibly — have looked like it had some truth.

Back then, high inflation could be matched by even higher pay rises because it wasn’t unusual for workers to have strong workplace representation.

On average, prices in Britain rose 12 per cent a year in the 1970s — but wages rose 15 per cent, meaning most people were much better off by the end of the decade than the start.

This increase in “real” incomes (meaning incomes after taking account of inflation) for employees was paid for by squeezing profits for bosses, which fell to record lows during the same decade.

The same isn’t happening today. Real incomes today are below their 2008 level, and even the government’s own forecasts say they won’t recover before 2025.

But profits are at record highs, recovering rapidly from the first hit of coronavirus. Companies like BP and Shell are making extraordinary fortunes on the back of rising prices.

Inflation today, far from being the side-effect of strong worker organisation, is leading to the transfer of wealth upwards into the hands of giant multinationals and the mega-rich. 

And the underlying causes of prices rises are not too many people with too much money trying to spend it.

Instead, we have seen a series of environmental and other crises over the last few years that have seriously disrupted how we can produce, transport and sell some critical goods.

Covid-19 was the most obvious of these, with lockdowns across the globe throwing the supply of goods into complete chaos. (And with China locking down aggressively in Shanghai, Shenzhen and other major cities, these “supply chain impacts” will return.)

But we have also seen extreme weather affecting production of food and other essentials across the globe, like the frosts in Brazil that hit coffee growers and helped push coffee bean prices up 40 per cent last year.

Throw in the severe disruption to Ukraine and Russia, together the world’s largest grain and fertiliser exporters, as a result of the war, and it is obvious price rises are not caused by borrowing costs being too low. There are real-world factors hitting the economy.

But by pushing up the cost of borrowing, through rising interest rates, and by raising demands for pay “restraint,” those making these arguments inadvertently expose the class interests at work.

A recession will mean misery for workers in Britain — whether through falling wages, or unemployment, or being forced into more insecure work, or simply the fear that any of this might happen.

Higher interest rates, at a time when more and more people are being forced to borrow to pay for essentials, would be disastrous.

But taken together, both rising interest rates and any squeeze on pay would look like protecting profits — even at the expense of the whole economy being dragged into recession. 

So interest rate rises should be opposed, especially if they start to creep significantly above their current, relatively low levels.

Better for the bank (as it is starting to do) to rein in its monumental “quantitative easing” money-printing programme, if it is worried about there being too much money in the economy.

Where price rises of essentials are destructive, government can act to restrain them, legally limiting or barring increases.

It is supposed to do this with the energy price cap, but has already let one £630 increase in bills go through this year.

But the principal demand for socialists now has to be for a major rise in wages and benefits, at least matching the official rate of inflation.

The TUC demonstration on June 18 could be the first big step in pulling together a national movement in defence of living standards.