I'm not super well versed in economics but it seems to me like the Bank of England raising interest rates in the UK could be unintentionally making the cost of living crisis worse and *increasing* wage-price stagflation more than necessary. Here's my theory:

Energy bills have risen, caused by the war in Ukraine (a striking resemblence to the 70s oil crisis but not quite as bad.) Furthermore, there have been supply shortages (e.g. food) due to weather events, increased border red-tape and labour shortages (partly because of a tougher stance on migration in the wake of brexit) leading to an increase in food prices. Basically, this is a supply crisis.

People immediately need to spend more on energy bills and food and this has led to a push for higher wages to meet cashflow demands, which has made them reluctant to stay in or take low-paying work (and it's also caused strikes which have an impact on productivity.) Businesses are therefore struggling with the shortage of cheap labour, which is mostly businesses that provide essential goods and services. This has lead to a "stagflation"-style wage-price war.

Then, interest rates were increased to reduce inflation.

High interest rates have driven up the cost of mortgages, and consequently rent, in a country where the vast majority (at least of those who are being affected by the cost of living crisis) are either paying a mortgage or renting, thus reducing the amount people have available to spend. They do not have much in savings (to benefit from the increased interest rates) and overspending was already low due to the crisis. They are also significantly less incentivised (by the high cost) to borrow to invest in energy efficiency measures, productivity or simply weathering out the storm by reducing their mortgage costs (by remortgaging at a longer term.) Instead, their only incentive (higher savings rates) points towards demanding higher wages.

Businesses that provide basic goods and services were already struggling to provide enough products to meet demand. Their wage costs are now rising, their rents have increased and their interest payments have risen. They have been effectively forced to take short-term measures to cut costs and increase revenue, such as mass redundancies and raising prices, which has resulted in lower supply and a higher cost of living for everyone. There is little competition effect to keep prices low because all businesses in these sectors are more or less in the same boat here; increased interest rates and nationwide supply crises affect businesses more or less equally. Like consumers, they also won't benefit from refinancing to weather out the storm (because of the high rates) and have little incentive to make investments into the measures needed to fix the supply chain issues.

In this theory, increasing interest rates too much may have simply increased the speed of the wage-price by squeezing both consumers and businesses, both of whom are passing their increased costs onto each other in a cycle whilst being unwilling to borrow long-term such to reduce their immediate repayments.

Effectively, the interest rate could be setting a minimum for the current level of inflation rather than simply reducing it because we are in a supply-crisis but not a demand-crisis (thanks to increased banking regulation, high interest rates and an end to QE.) Wages and prices could simply tend to rise against each other at a rate similar to the real cost of borrowing for businesses and consumers: if wages and prices rise faster than borrowing rates, people/businesses will borrow and invest in the economy, fighting stagnation; if they rise lower than borrowing rates, borrowing decreases and the correction of the supply issue slows down.

Potentially, if interest rates were too high during a supply crisis, the ongoing damage of stagnation to the economy could be higher than growth, leading to a recession until the economy can't recess any further naturally because demand has dropped to meet supply, or because the crisis ends and supply increases again.

From all I see, the path out of the cost of living crisis is to reduce interest rates to or slightly below the target inflation rate of 2%: this would reduce mortgages and rents again, allowing businesses to reduce their interest payments and rents and make investments that allow them to bring in more people at the higher wages they demand onto projects that will fix the supply issues in the medium-term, leading to lower costs for the business, higher competition, lower prices and less demand for wage increases because of these lower prices and generally lower rent/mortgage costs. The pressure of high borrowing costs on the price-wage war would be alleviated, lowering its contribution towards inflation and making us more likely to meet the target rate, whilst also avoiding a demand crisis by setting interest rates too low whilst there is still a supply crisis.

Anyway, I thought this was interesting and I'm not an economist so I wanted some opinions.