Bailey said that consumer price inflation (CPI) doesn’t have to fall to the BoE’s target of two percent before it starts cutting interest rates. I was stunned. Truly. That’s the first flash of common sense I’ve seen from the governor in ages.
It raises hopes that the UK will see the first base rate cut sooner rather than later. I’d always imagined the BoE’s technical hurdle for cutting rates would be “when hell freezes over” or something similar, but apparently not.
Bailey has made a thoroughly bad job of inflation throughout, as I’ve repeatedly highlighted on these pages.
He failed to hike rates early enough to keep a lid on price pressures. Now he’s making exactly the opposite error, by refusing to heed signs that inflation is on the run and cutting interest rates.
We desperately need that cut, with the UK falling into a recession in the second half of last year.
The BoE is partly to blame. In fact, it helped engineer the downturn, tightening monetary policy to take the heat out of the economy.
That job is done. Time to change course.
I’m not the only one tearing their hair out at the BoE’s unforced errors. The BoE’s former chief economist Andy Haldane has felt compelled to speak out.
On Monday, he warned the BoE risks “crushing” the economy by failing to cut interest rates fast enough.
Haldane warned that keeping base rates too high for too long could prolong the recession, and hammer the BoE’s credibility, too.
He told Bloomberg: ‘It’s one thing to have missed inflation on the way up, which happened, it’s quite another to then have crushed the economy on the way down.”
Haldane added: “That double blow to credibility is one – if I were a central banker, in my old job – I’d be looking to avoid.”
This isn’t just some pundit shooting their mouth off. Haldane was noisily warning about the inflation threat long before Bailey woke up to the threat.
His credibility is intact. Bailey’s has been shot to pieces. He’s still there, though, presiding over hugely important decisions that will affect everybody.
Frightening.
Given today’s struggles, maintaining base rate at today’s 16-year high of 5.25 percent isn’t just unnecessary. It’s gratuitous.
Incredibly, two members of the BoE’s rate-setting monetary policy committee (MPC) actually voted to hike rates earlier this month. Common sense is still spread thinly at Threadneedle Street.
The UK economy is struggling and Chancellor Jeremy Hunt’s headroom to revive things with a tax cut or two appears to be shrinking by the day.
That leaves base rate cuts as just about the only meaningful policy weapon left in the country’s financial armoury. So when will we get them?
READ MORE: Recession is yesterday’s news but we need BoE interest rate cut NOW
In my view, the Bank should have cut the base rate back in December or January. It should definitely cut at its next meeting on March 21.
Sadly, it won’t.
Markets are taking bets on a rate cut May or June but why wait?
Forecasters reckon inflation will fall to two percent as soon as this April, when Ofgem cuts the energy cap.
After that there’s no excuse for foot-dragging, although Bailey and the MPC may still come up with some.
Bailey has himself admitted that bank data has turned out to be wrong, and a poor basis for decision-making.
Yet he continues to slavishly follow it. Doesn’t he have any judgement of his own?
Yesterday, he took a small step towards reality. Now he needs to take a big brave leap (for him) and get things moving.
As he said yesterday, “the economy is already actually showing distinct signs of an upturn”.
An early rate cut would give it a push in the right direction. So please, Mr Bailey. Just get on with it.
