Did the governor of the Bank of England, Andrew Bailey, err in exaggerating the prospects of an interest rate rise? It seems so. Mr Bailey’s intervention, along with his chief economist’s, suggested the base rate might rise this week. City traders are now betting that it will do so – with the Bank’s rate-setting monetary policy committee (MPC) due to pronounce on Thursday. The governor is now damned if rates rise – giving the impression that the central bank can be talked into a hike. And he is damned if they do not – because he signalled rises that did not arrive.
There is no pressing reason for money to be made dearer. For many, employment is far more precarious than the official figures suggest. Business surveys report more pessimism than optimism about the UK’s prospects. The chancellor did not help by precipitately withdrawing the fiscal stimulus. The budget ended the furlough scheme, reduced benefits and raised taxes, leaving – as the Institute for Fiscal Studies revealed – wages stagnant for years to come. This, combined with higher interest rates and a bumpy path out of Covid, risks a recession, not a recovery.
The economists David Blanchflower and Alex Bryson point out that, in the last MPC meeting in September, there was a 9-0 vote to keep rates at their current level of 0.1% as the “elevated global cost pressures will prove transitory”. Nothing has changed, say the academics, about that prudent judgment. One reason to raise rates would be to bring inflation to heel, but the economists say this is unnecessary. They compare Covid to a hurricane hitting an island. Once the storm recedes, everyone wants plumbers, roofers and electricians “whose wages rise dramatically for a while and inflation goes up temporarily. But eventually, after a few months, things get back to normal”.
A rate hike would promote a needless deflationary shift of disposable income from poorer households that spend to richer ones that do not. In the past decade, the Bank has not used rates to cool asset (ie house) prices. There is little chance that it would now. There are reasons for a rate hike. One is to pay banks more to hold risk-free financial assets. A second is to put upward pressure on the currency, which would benefit City interests. A third is for the Bank to regain control of interest rates by tightening and then offering gilts to private investors rather than purchasing them itself. Raise rates for these reasons and the Bank might look captured by the financial interests that it is meant to oversee.
Escaping the pandemic is proving more difficult than the easy getaway that was once imagined. Letting the Bank’s monetary policy – rather than Treasury spending – do the heavy lifting in these circumstances is far-fetched. The European Central Bank and the US Federal Reserve have blundered since 2010 by tightening too quickly out of a slowdown. Leaving rates unchanged seems the least bad option. Better to wait and see. The four external MPC members are unlikely to back a rate rise. The four undecided bank staff on the committee may do so to please the boss. Mr Bailey risks his credibility if this turns out to be a mistake that has to be reversed.
