Once again, the Bank of England missed a trick by not cutting interest rates earlier this week, an error which may well come back to haunt the Old Lady.
By getting its timing so wrong, the danger now is that rather than gently bringing down rates over the next few months – as it had hoped to do – the Bank will be forced into having to slice rates salami-style to rescue the economy from recession. Or worst of all worlds, from stagflation.
Cutting rates from a position of weakness, rather than being ahead of the curve and in control, is never a great strategy.
Which is why the Monetary Policy Committee’s decision to hold rates at 4.75 per cent is all the more bizarre as it also goes against the global trend.
Missing a trick: Bank boss Andrew Bailey
Both the US Federal Reserve and the European Central Bank (ECB) have been more aggressive, cutting rates recently to stimulate growth and stave off recession.
What’s more, the ECB says it will continue to cut, another factor behind the huge spread between UK and German ten-year bond yields, and the rise in UK gilt yields to Liz Truss-style levels.
Why then did Andrew Bailey, the Bank’s governor, and five others of the nine-member Monetary Policy Committee (MPC), not budge on rates? And why is there such a split, with three members – Swati Dhingra, Dave Ramsden and Alan Taylor – voting to trim rates by 0.25 percentage points?
The reason is that the Bank remains fixated on inflation, worried that rising prices and higher wage settlements will reignite a surge in inflation.
Yet at the same time, the Bank is nervous about the wider economy, warning that the country has ground to a halt, and downgraded its growth prediction for the last quarter to zero from 0.3 per cent.
The Bank’s boffins are stuck in a dangerous zero-sum game. Which is worse? A contracting economy or a little inflation?
The three who voted for a cut did so on the grounds that current levels are too high, and are restricting business activity. They are right. Even a tiny cut would have been enough to lift the mood for businesses and consumers alike.
But Bailey takes the view that it is the latter, arguing that a gradual approach to cutting interest rates remains the right approach because of the ‘heightened uncertainty in the economy’.
That uncertainty has been triggered almost entirely by Keir Starmer and Rachel Reeves themselves. The duo have been trashing the economy ever since taking office, while the Chancellor’s tax hike slammed the brakes on business activity as well as consumer confidence.
That’s surely reason enough for the Bank to have been bolder. After having ignored signs of the inflationary spiral during the Covid era, MPC members have now become too consumed by rising prices rather than looking at the wider picture.
HSBC’s economists point out that we shouldn’t be too worried by November’s higher inflation number.
This was mainly due to Reeves jacking up petrol and tobacco duties in the Budget. And while wages were picking up ahead of the Budget, rises are now petering out.
What a mess. Yet the MPC could so easily have defended a cut.
It has the remit to do so as, in its own words, the MPC ‘sets monetary policy to meet the 2 per cent inflation target, and in a way that helps to sustain growth and employment’.
There you have it – in a way that helps sustain growth. It failed.
Trump the tariffs
If anyone can schmooze their way through Trump’s court at Mar-a-Lago as well as Washington DC, it is the Prince of Darkness, aka Lord Mandelson.
His appointment as the UK’s Ambassador to the US is one of Starmer’s shrewder moves, and there haven’t been many.
Mandelson, like Trump, is a wheeler-dealer as well as a master shapeshifter. Although the former Business Secretary has been horribly rude about the president-elect in the past, declaring him a danger to the world, he’s gone out of his way since the election to rubbish the Democrat campaign, suggesting that much of Trump’s noisy rhetoric is merely ‘hyperbole’.
His challenge now is to negotiate a hugely important free-trade deal with the US, our biggest trading partner.
Trump has already indicated the UK won’t be subject to big tariffs, and that he expects trade with us to increase ‘three to four, five times’ present levels. Mandelson may have met his match.
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