One of the big battles likely to be fought at Westminster this autumn will be over interest rates. This may seem an odd subject for a political row. Didn’t Gordon Brown remove interest rates from government control more than two decades ago? Isn’t Threadneedle Street the other side of London from the House of Commons? Yes and yes – and yet that hasn’t stopped monetary policy featuring in every economic debate since the 1990s, from the loss of industry to the austerity years. This time around, the worry is over inflation and whether the Bank of England is too relaxed about rising prices.

Last month, a House of Lords committee castigated the bank for its “addiction” to creating money through its £895bn quantitative-easing programme which, it claimed, could push prices up further. MPs on the right of the Conservative party are also starting to worry about inflation and what happens if the bank has to raise interest rates.

Two separate issues are at work here. The first is that prices are going up as the economy thaws out from the deep freeze in which it was placed at the start of the pandemic. There are also shortages of both material and workers, in a country dealing with the twin issues of Brexit and Covid. All this probably means inflation will remain higher than the bank’s 2% target. What there is little sign of yet is significantly rising wages. As the furlough scheme winds down, joblessness is bound to rise and the fact that Boris Johnson even dared to offer nurses a 1% pay rise after their year from hell says a lot about the relative powerlessness of the average British employee.

Set aside the sugar rush of spending by consumers largely shut away for 14 months and the frenzy in the housing market, and the economy remains in a very fragile state. The factors driving this go far beyond any pandemic or issue at the Northern Ireland border, as has been made clear by a senior economist at the Bank of England. Gertjan Vlieghe was appointed to the bank’s rate-setting committee by then-chancellor George Osborne and has proved a thoughtful commentator on the UK economy. On the verge of stepping down, his valedictory speech made last week is remarkable for going beyond the usual banker’s fare.

The great weakness of the UK, he says, lies in the policies it has followed for decades. “The low tax, low regulation regime combined with globalisation ended up widening income disparities in a way that not only hurt those at the bottom of the income distribution, but ended up having adverse macroeconomic effects.” Those effects include very high levels of debt held predominantly by households and low levels of workplace productivity, which is the result of businesses not investing. Add all those together, Mr Vlieghe suggests, and the UK is stuck in a deep rut of low growth and low rates. In other words, the exact hue of Conservative most worried about low rates has been a cheerleader for the very policies that mean we are stuck with low rates. To fix this situation, the central banker proposes stronger trade unions, much tougher rules on competition and higher taxes. Such policies are not in the bank’s gift but the government’s. Will Boris Johnson implement them? If he did, he might legitimately call them “levelling up”.

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