Business confidence has plummeted back to the levels last seen in the wake of Liz Truss’s unfortunate mini-budget. Hiring has slowed down as employers worry about all the new rights Labour is about to award their staff. Consumer confidence has fallen, as people worry about the tax rises that will be imposed in the ‘Horror Budget’ set for the end of the month. And the economy, which was growing at a decent clip when the Conservatives left office, has now stalled, with zero growth in the latest quarter. The new Chancellor Rachel Reeves was facing a spluttering economy. But, hey, never mind. It turns out that the Bank of England is here to help – the only problem is its Governor Andrew Bailey may come to regret that decision.
In an interview published today, Bailey offered the Chancellor a rare piece of good news. After keeping rates on hold following a single, modest quarter-point cut earlier this year, Bailey argued there was a chance the BoE could become ‘a bit more activist’ in its approach. He was encouraged to see inflation coming down, and although there was a risk that conflict in the Middle East might drive it up, that should allow the Bank to start reducing the cost of money again. As the remarks were published, the pound started to fall as the markets assumed rate cuts were on the way.
Sure, that will help Reeves. It was starting to look as if she had talked her way into a recession, but lower interest rates will help consumers as mortgage rates will come down. It will also reduce the vast costs of servicing the government’s huge debts, while a lower pound will help exporters. It might be just enough to allow the British economy to eke out the 1 per cent growth that now seems to be the most it can aspire to.
The trouble is, there are two big problems with Bailey’s intervention. To start with, it is far from clear that inflation is still falling. In September, the rate stuck at 2.2 per cent, even though it is still coming down in the US and the euro-zone, suggesting that, as so often in the past, price rises are stickier in the UK than elsewhere. Even worse, many of the government’s policies, from massive pay rises for the public sector, to soaring energy bills to pay for net zero, are likely to drive it even higher. If Bailey can actually detect signs of easing price pressures in the UK he must have a very powerful microscope. Next, it will look dangerously close to helping out a government that has, despite taking office with a huge majority, been flailing around for an economic strategy. The Bank is meant to be strictly impartial, but having declined to cut rates in the run-up to the general election it will look odd, to put it mildly, to cut them soon afterwards unless there is overwhelming evidence for doing so. In reality, there is very little case for accelerating rate cuts – and Bailey will regret hinting that there is.