After a faltering start in its programme of rate rises, the Bank of England is catching up. Today’s half-point rise in its base rate to 3.5 per cent may be relatively modest compared with last month’s 0.75 per cent rise, but it is still twice as high as any rise the Monetary Policy Committee (MPC) was prepared to inflict on the economy during the first quarter-century of its existence.

The MPC has turned itself into a prisoner of the markets – if it does anything unexpected, there is likely to be trouble

In the space of three months rates have now been jacked up by 1.75 per cent. That is serious stuff. It is as if the MPC has suddenly woken up and told itself: look, the whole purpose of our existence is to control inflation. Not to stimulate economic growth, nor even to balance the often-competing interests of inflation and economic growth, but purely to keep the Consumer Prices Index as close to two per cent as possible. That is what the MPC’s mandate stipulates, but for many years it has seemed to act as though it has a wider objective of managing the economy.

For months, while inflation was surging at the end of 2021 and early 2022, it sat back and did little. The result is almost certainly that inflation has reached a higher peak than it would have done had the bank acted sooner.

Markets haven’t shown too much interest in today’s decision, not least because a half point rise is exactly what was expected – the FTSE is down around half a percent. But the minutes do reveal that there are still dovish tendencies in the MPC: two members voted to keep rates on hold this month.   That might not have been received so well by markets, given that they would have seen it as a case of rate rises postponed, not cancelled. By treating inflation too lightly for too long, the MPC has turned itself into a prisoner of the markets – if it does anything unexpected, there is likely to be trouble.

What is conspicuously absent so far this year is a Santa Claus rally in markets. Historically, December has often been a strong month for stock markets. Until a week ago it looked as if this year would be no exception. But the rally in evidence since mid-October seems to have stalled – and that is in spite of growth in October coming ahead of expectations. There is still a weight of opinion that believes the worst for the economy still lies ahead. The MPC has done nothing to change that sentiment.

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