The Bank of England ought to slash charges, says ALEX BRUMMER

Labour’s growth plan, at the core of its election pledges made 21 months ago, still shows no sign of working. Output was in the doldrums long before the outbreak of the US-Israel war against Iran.

The conflict is causing energy prices to rocket and will deliver a severe blow to consumer and business confidence.

The economy stalled in January when there was zero growth, despite the green shoots seen in recent S&P purchasing managers’ index surveys. Every lever the Chancellor Rachel Reeves pulled has jammed.

At the core of Reeves’ growth agenda was a housebuilding and construction splurge to be fuelled by planning reforms.

A government target of building 300,000 homes a year in its first term is dead in the water. It barely receives a mention now despite being front and centre of the early narrative. 

Construction showed some signs of life in January but from an extraordinarily low start. 

Cut and run: Raising rates would be a blunder and the last thing needed is a credit crunch as rising prices and disruption in unregulated private debt markets collide

The Institute of Directors notes that the sector ‘remains very weak as regulatory delays and depressed demand continue to drag on housebuilding.’ 

There are fears among leading economists that Reeves’ effort to drive output by cutting the banks loose is a fresh disaster in the making. 

Bullish language used when Barclays banker Katharine Braddick was named as head of the Bank of England’s Prudential Regulation Authority (PRA) is seen as wrongheaded.

The Treasury enthused about Braddick, arguing the choice was aimed at reducing burdens on business and supporting high loan-to-income mortgages. The PRA was created to prevent a repeat of the Great Financial Crisis.

In case Whitehall hadn’t noticed, high-value mortgage provider Market Financial Solutions collapsed last month.

Moreover, cash is fleeing private credit markets. Bad debts and falling asset values are plaguing regulated banks.

Reeves might best use her Mais Lecture next week to provide cool-headed analysis of the Gulf war shock and how the Government intends to protect taxpayers and businesses. Instead, pre-briefing to the FT suggests Reeves will be pushing for closer economic ties to Europe to bolster growth.

That might be fine were the EU in sprightly form. The eurozone is stagnating and Germany and France appear determined to freeze Britain’s aerospace and defence manufacturers out of the sharp lift in military spending.

The war in the Middle East and the blockage in the Strait of Hormuz are proving an inflation bombshell despite global releases of stocks from oil reserves. 

Wholesale prices of electricity are up 74 per cent in the UK, and gas is up 68 per cent. Air fares are soaring. The cost of two-year fixed-rate mortgages has climbed above 5 per cent.

Betting in financial markets is that with war-induced inflation looming the Bank of England will hold or could even increase the base rate from the current 3.75 per cent. Rate setters want no repetition of the post Covid-19 and Ukraine war debacle when prices headed to the stratosphere.

Raising rates would be a blunder. The last thing needed is a credit crunch as rising prices and disruption in unregulated private debt markets collide.

Britain’s economy is stuttering, City scribblers are cutting output forecasts, and some are predicting stagflation or even recession. 

The Bank should look through the temporary inflation shock and give a moribund housing market and growth a chance with a sharp half-point, or even a full-point, interest rate reduction.

That would be a better way of stimulating output than easing prudential rules designed to future-proof the financial sector against the next crash.