Interest charges should be left on maintain, says ALEX BRUMMER

The Bank of England, along with other advanced countries’ central banks, faces a huge dilemma. All the signals from the prolonged stand-off in the Strait of Hormuz is that a great inflation is on the way.

Here in Britain the consumer prices index rocked up to 3.3 per cent in March, from 3 per cent, and the odds of hitting the Government’s 2 per cent target retreated.

The question for central bankers is: Will the inevitable effect of higher energy, fertiliser, air fuel, shipping and insurance costs feed into the sinews of the economy?

This happened after the outbreak of Russia’s war on Ukraine. The belief then that higher prices were ‘transitory’ turned out to be a terrible error.

Central banks, since the 2008 great financial crisis, wear two hats.

Politicians enhanced the bankers’ regulatory status after a crisis which began as a credit crunch, with banks refusing to lend to each other in money markets. Since then, the Bank of England, the US Federal Reserve and the European Central Bank have been gifted full responsibility for the hygiene of the global financial system.

Steady: Andrew Bailey is inclined to hold rates at 3.75 per cent, rather than rushing into an increase

Warnings from BoE deputy governor Sarah Breeden in a BBC interview that, despite the risks, ‘asset prices are high’ was a less elegant echo of former Federal Reserve chairman Alan Greenspan’s 1996 alert of ‘irrational exuberance’. Greenspan’s caution proved correct when the dotcom bubble burst in 2000.

Interest rate decisions have a nasty habit of playing a big role in market meltdowns.Ahead of the 1929 crash the Federal Reserve – relatively new to central banking – was intent on curbing speculation.

It raised its then key discount rate as part of a concerted effort to curb reckless trades in shares. In so doing it had the support of Herbert Hoover, the Republican White House incumbent.

A major factor in the October 1987 stock market meltdown was a dispute between the US and Germany over interest rates.

The German Bundesbank, focused on monetary excess, insisted on raising rates in the face of American opposition amid fear of a run on the dollar.

After the dotcom implosion the Fed kept rates low (dropping to just 1 per cent in 2003) and this, together with massive injections of cash by central banks, helped to prevent the 2008 crash from bringing the whole capitalist system crashing down.

The big question for Bank of England rate-setters, when they meet next week, is what to do about inflation.

Members of the Monetary Policy Committee will be anxious to avoid the errors of 2022 after Russia’s war on Ukraine.

The inflation genie escaped and consumer prices rose 11 per cent. Governor Andrew Bailey’s role in the debate will be critical.

He has indicated that it is too early to assess the medium-term inflationary impact of the Gulf war.

The Governor is inclined to wait and see, holding rates at 3.75 per cent, rather than rushing into an increase.

And, as chair of the Bank’s financial policy committee and the global Financial Stability Board, Bailey will be more than aware that raising rates, in the face of an economic shock from the Middle East, could trigger a flight to cash and potential safety every bit as devastating as previous crashes.

That’s why he should want to keep the money supply loose and rates low.