The Bank of England is faced with the sort of choice that central bankers prefer not to confront. Inflation is far too perky, which warrants higher interest rates. The global financial system, however, is in an unexpected state of stress: the financial “central heating” is on the blink. Past financial upheavals might suggest the need for interest rate cuts.
There has been much talk about a repeat of 2008, the year in which Lehman Brothers failed and the global financial crisis became a hideous reality. But the comparison can only be taken so far. Back then, there was a massive loss of trust in assets that, hitherto, had been snapped up with enthusiasm: those who thought they had piles of nice, safe, collateralised debt obligations on their balance sheets discovered that what was once safe was now highly toxic.
