Dear reader,

Planning to fail might be a plan, but you’re still going to fail. That’s how I’d sum up Bank of England policy right now. From anticipating neither inflation nor recession: it’s now actively trying to deliver both.

The combination of expecting 10% inflation, the worst economic outlook since the Bank’s independence, and plenty of interest rate hikes to come is quite a combination.

It appears the Bank of England is intent on delivering stagflation. Its anticipated monetary policy is included in its projections, after all.

This is no longer just a matter of missing the inflation we’ve seen. It’s no longer about ignoring the rising inflation. We’re now talking about deliberate policy leading to a recession and 10% inflation.

Personally, I thought the fear of causing a recession would make the Bank about-turn and keep the printing presses running hot, inflation be damned.

The other possibility was for the Bank to hike rates and send inflation back down by way of causing a recession – à la Paul Volcker at the US Federal Reserve in the early 1980s.

I described the situation as a tightrope walk with inflation on the one side and a recession on the other.

But falling off both sides simultaneously? In my two years as a tightrope walking instructor, I never saw that.

Stagflation – the combination of recession and inflation – was supposed to be a historical anomaly. Now it’s what the Bank of England is warning could happen as a result of its policies, and thereby what central banks are trying to achieve with their policy.

Of course, this shouldn’t come as a surprise. Everything else which governments do is a complete debacle. Why would monetary policy be any different?

If we charge a central bank with keeping inflation low and managing the business cycle, what should we expect but inflation and a recession?


… perhaps we’re being a little unfair to the Bank of England. After all, it’s got plenty of company.

“From historic opportunity to historic cock-up,” is how The Australian newspaper described the same situation in Australia. Although that was a month ago. Things have got even worse since then.

The Reserve Bank of Australia (RBA) had made all sorts of promises in its attempt to get unemployment below 4% – the historic opportunity referred to.

The plan was not to raise rates until 2024, until wage growth was above 3% and until inflation was between 2% and 3% longer term (once the “transitory” bout of inflation had calmed down).

This was a big mistake because it presumes relationships between these variables. In particular, it is based on the premise that inflation couldn’t surge past 5% with wage inflation still in the doldrums.

The Germans understand this mistake very well, having done a better job of making it than just about anyone about 100 years ago. That’s why they insisted the German and European Central Bank (ECB) have only one mandate – fighting inflation.

The rest of Europe, however, has spent the last few decades watering this mandate down even faster than the Americans have diluted their constitution.

Back to the RBA again.

First the RBA was so badly humiliated by inflation that the governor of the RBA even admitted to being embarrassed. Then the RBA raised interest rates two years before its promise, and before wage growth was above 3%.

That’s none for three…

I’m not sure who’d win the Ashes in the competition between the Bank of England and the RBA, even if we do have the captain of the Bank’s cricket team hiding on our editorial team. But I know those ashes would consist of burned pound and Australian dollar banknotes.

Over in the United States, at least they’re choosing which side of the tightrope to fall off (which is one of the first lessons of tightrope walking safety, by the way).

The Financial Times describes the act in graphic detail: “Fed reaches for its ‘hatchet’ to attack galloping inflation”.

As part of his hatchet of an interest rate increase, Fed chair Jerome Powell declared there will be “some pain” and “hardship” for the US economy, but that it wouldn’t lead to a recession.

Well, the US economy already shrunk 1.4% annualised in the first quarter of 2022, before the hatchet rate hike, so how is a recession even avoidable?

I remain unconvinced the Fed won’t change its mind and, in the spectacular fashion of a doomed tightrope walker who refuses to bow to the inevitable, will wave its arms and wobble its hips a little longer, before choosing inflation as the lesser of two evils.

Or perhaps they’ll choose the Bank of England’s path and deliver both a recession and inflation. A 0.5% rate hike to 1% isn’t exactly going to bring down inflation of more than 8% after all.

But save your scorn for the worst of the lot.

Having immolated Greece while in charge of the International Monetary Fund (IMF), Christine Lagarde is now imposing 10% inflation on the impoverished Greeks as head of the ECB…

But let’s not make this personal for the lady who was criminally convicted of financial negligence for her time as French finance minister.

Actually, let’s… because the ECB still hasn’t raised interest rates!

Inflation in the Netherlands? Almost 10%.

In Greece? 10.2%.

In Germany? 7.8%.

The ECB’s mandate? Less than 2%.

ECB monetary policy? Continued quantitative easing (QE) and its first rate hike is only present in the German board members’ imagination.

Things are so bad at the ECB that its own staff are revolting over the combination of inflation and a lack of pay hikes!

What a mess!

After a decade of predicting inflation would return to 2%, but failing to deliver, central banks panicked about deflation because of the pandemic. They then didn’t see the inflation coming and didn’t do anything about it until it had overshot their mandates by multiples (some still haven’t done anything). Now they’re forecasting both a recession and inflation – the worst of both worlds – as a consequence of their policies to catch up with the programme.

Even I’m impressed with how badly this is going.

But not as impressed as the new head of the IMF:

I think we are not paying sufficient attention to the law of unintended consequences. We take decisions with an objective in mind and rarely think through what may happen that is not our objective. And then we wrestle with the impact of it.

Take any decision that is a massive decision, like the decision that we need to spend to support the economy. At that time, we did recognize that maybe too much money in circulation and too few goods, but didn’t really quite think through the consequence in a way that upfront would have informed better what we do…

We act sometimes like eight years old playing soccer. Here is the ball, we are all at the ball. And we don’t cover the rest of the field.

I would prefer to have eight-year-olds running monetary policy, at this point.

Nick Hubble
Editor, Fortune & Freedom