Only one tool

There’s a saying: if the only tool you have is a hammer, every problem looks like a nail. For the last two decades, Britain has been battered by a relentless roll-call of external global shocks. The 2008 banking crash. The global COVID pandemic. War in Ukraine. War in the Middle East. Every one of these crises was a real-world resource shock. They were disruptions to international energy supply chains, global shipping routes, and physical production lines.

Yet, how did our institutions respond? By swinging the exact same financial hammer.

When Vladimir Putin choked off gas supplies to Europe, driving up the cost of electricity, the Bank of England’s Monetary Policy Committee responded by aggressively raising interest rates.

Stop and think about that for a moment. Does raising the cost of a business loan in Newcastle create a single extra cubic metre of gas? Does making a mortgage more expensive for a family in Manchester harvest a single extra grain of wheat? Of course not.

Look at your own shopping bill. Food price inflation hit 19.1% in March 2023, the highest rate since 1977. Not because British shoppers suddenly wanted more bread. Because the war in Ukraine choked off grain and fertiliser, and the gas crisis pushed up the cost of running a food factory or a cold store.¹

The Bank’s answer was the same lever it pulls for everything: raise rates. Fourteen times, from near zero to 5.25%. That makes it more expensive for a British farmer to buy a tractor, or a food producer to keep the lights on. It doesn’t grow more wheat. It just adds a domestic cost on top of a foreign shock, and hands the bill to a family already struggling at the till.

To be fair to the Bank of England, that’s the fault of successive governments who’ve refused to hand the Bank any other tools. It has a one-dimensional mandate: keep inflation at 2%, and do that by lowering or raising interest rates. Or in a crisis, deploy quantitative easing: creating money to buy bonds back from the secondary market.

Growth and employment are in there as secondary objectives. But they are only to be supported once the inflation target has been met. So in practice, they never take effect.

The assumption is that raising interest rates takes demand out of the economy, dampening inflation. It does, but not evenly. It mainly works through affecting mortgage prices, and only 29% of English households have one. More older people own their homes outright; and if they have substantial savings, the opposite effect applies: high interest rates increase their spending power. So increasing rates bite hardest on under a third of the country, while savers and outright owners gain.

Some prices ignore it altogether. Rail fares, water bills, business rates, and mobile contracts are indexed to inflation by contract. They rise because inflation rose. Bank Rate doesn’t touch them. That’s not demand outstripping supply. That’s inflation propagating through paperwork. The Bank knows this. In April 2026 the Governor wrote to the Chancellor to explain why inflation had missed the target. Most of the answer was a war, a shipping lane and the price of fertiliser. The Committee held the Bank Rate where it was.

Take a domestic example. In April 2025 employer National Insurance went up. The Bank’s own estimate is that this fed through into services prices. A rate rise cannot reverse a payroll tax. It can only put a second cost (interest payments) on the firms already carrying the first (increased employment costs). And by the time a rate rise bites, the tax rise has already dropped out of the inflation figures, which only look at the previous 12 months and whether prices are now stable, rather than too high.²

The tool is also slow. The Bank’s own working assumption is that a rate change takes eighteen months to two years to reach its full effect on prices.

Steering an economy this way is like steering a ship by dragging an anchor. It works. Crudely. But it takes miles to bite, and something gets torn up on the way.

It doesn’t have to be done like this. The United States doesn’t run its central bank this way. The Federal Reserve has a statutory dual mandate: maximum employment and stable prices, ranked equally.³

British Prime Ministers are falling like flies because they are trapped in this loop. They decline to fix the root problem: our dependence on volatile international markets for our foundational needs. Inaction is the real gamble. By failing to build domestic self-sufficiency, our leaders are making us hostages to the next global shock.