Contrasts are bound to be made between the decisive half-percentage point cut in US interest rates and the decision by the Bank of England to hold its base rate at 5 per cent.
All kinds of excuses can be made for the unwillingness of Governor Andrew Bailey and the interest rate-setting Monetary Policy Committee (MPC) to act at the September session.
Just to do the Bank’s communications on its behalf, there are several reasons it could have cited.
It might have said it had no foresight on the Federal Reserve’s decision to lower rates by half a percentage point even though the possibility had been in the markets for more than a week.
Caution: Bank of England governor Andrew Bailey and the Monetary Policy Committee held the bank rate at 5% at their September session
Or Bailey could have explained the MPC was holding fire until the Budget, when it would have a fuller understanding of Labour’s fiscal stance.
But unlike Jerome ‘Jay’ Powell, chairman of the Fed, the Bank has no mandate to target employment and, by implication, growth.
None of the glosses are good enough. After a brisk start to 2024, output has stalled in recent months.
Government (the biggest borrower of all), consumers, mortgage payers and small businesses – at the mercy of rapacious banks – need lower money costs.
Moreover, there is absolutely nothing in the minutes of the MPC to suggest there is an inflation hurricane coming down the pike.
The most obvious threat to price stability – the free and easy way in which Keir Starmer has given way to above-inflation pay deals in the public sector – does not get a mention.
One might think at least one member of the nine-person MPC might have voiced concern that rewards to railway workers and junior doctors might influence private sector settlements. In the worst-case scenario, this might lead to a wage price spiral.
On the labour market, the MPC confines itself to the perennial complaint about jobs data being unreliable and a passing reference to possible increases in the national minimum/living wage.
Instead of buying into the optimism of a consistent improvement in consumer prices, the decision-makers adopt the hardline language of monetary machismo.
The minutes say the Bank continues to be guided by the need ‘to squeeze persistent inflationary pressure out of the system.’
When inflation was rampant in the aftermath of the pandemic, eventually hitting 11 per cent, the MPC kept policy loose, arguing the price changes were ‘transitional.’
What was actually happening was a cost of living crisis accentuated by Russia’s war on Ukraine.
Now that prices, including energy prices, are back on an even keel and for the moment wages are not troubling the committee, there was an opportunity for the Bank to get ahead of the curve.
In much the same way that it was slow to raise rates on the way up, it is now committing the same error on the way down.
All the signals ahead of October 30 are of a tough Budget with tax increases and spending restraint. If there was any doubt on this, Treasury observer Sam Beckett was in the room.
The case for easing the pressures on ordinary working people and struggling enterprises by scything borrowing costs is overwhelming.
The dissenting member of the MPC, Swati Dhingra, has consistently pointed out that there are ‘lags’ in the time it takes for monetary policy to work. So it is better to become less restrictive now, by cutting by a further quarter of a percentage point, rather than delay.
The only nudge the Bank has taken towards easing policy is a decision to reduce its holdings of Government stock by £100billion over the next year.
It is abundantly clear that the Bank needs more members of the MPC willing to think out of the box.
It was hoped that the newest member of the committee, British-born Columbia University professor Alan Taylor (an opponent of George Osborne’s austerity) would buy into the growth agenda. Maybe it will come.
But as future appointments come into view, Chancellor Rachel Reeves has a real opportunity to end the group-think and the apparent Treasury view that the Bank is a comfortable home for ex-mandarins.
Decision-makers with more diversity of opinion and business know-how ought to be the priority.
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