As the FT noted yesterday:
The Bank of England may need to cut interest rates as many as five or six times over the coming year because of the stalling economy, a UK policymaker has warned, as he urged the central bank to take action to secure a “soft landing”.
They added:
Alan Taylor, an external member of the Monetary Policy Committee, said on Wednesday that the BoE's “gradual” approach to rate reductions implied four quarter-point cuts by the end of 2025, taking the cost of borrowing to 3.75 per cent.
But in a speech he warned of an increasing risk that the weakening economy would need a “more accelerated pace of rate cuts” that would lead the BoE's benchmark rate to fall by 1.25 or 1.5 percentage points in the next 12 months.
That this has been sad is welcome, of course. However, the pace of change he proposes is way too slow for the UK economy.
Our base interest rate is 4.75% when that bin the eurozone is 3%.
Inflation is under control in the UK. The Bank of England thinks the rate is declining and on target.
Meanwhile, the economy, government, and lives are being crushed by the burden of high interest rates, which are increasing inequality and denying hope.
The need is for a rate cut of at least one per cent now. There is no reason to delay. More can then follow.
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Spot on Richard. It’s the common sense approach.
Just remembered the latest definition of common sense. It’s not a group approach to a situation but the decision an individual makes based on their own experiences.
Bailey regrettably is not likely to recommend an immediate 1% cut, because his apparent belief is that such a cut would fuel UK inflation and he must defeat inflation.
Of course Ms Reeves can order Bailey to make the cut but with her current pronouncements this will not happen.
The Labour leadership keeps parroting about creating economic growth but do not seem to be able to see that any likelihood of growth is being throttled by their own policy.
Utterly clueless.
It’s welcome that there is some acknowledgment that rates might need to come down…. but it is significant that this observation comes from and external member of the MPC. Amongst the high-priesthood of BoE insiders I am not sure this view will be well received.
Also, we should not be looking at potential “changes in rates” we should always look the “level of rates”. Rather than say we might need a bigger change in rates we should ask “what is the correct level of rates given the information we have right now”.
Inflation at 2.5%, growth poor – base rate at 3% seems sensible.
But what do the banks and market makers think? After all, they seem to be dictating economic policy at the moment.
That is, of course, a rhetorical question. High rates with inflation under control really suits them a lot!
Lots been written over the last week about markets “disciplining” the government or “bond vigilantes”… but the reality is rather boring.
Market went down a bit on the back of strong employment data in the US; market bounced back a bit in response marginally better than expected inflation data.
It appears to me that certain sections of the press are just desperate to make the facts fit a Truss/Kwarteng induced gilt meltdown…. but they don’t.
MMT’s Mosler and Forstater wrote “The Natural Rate of Interest Is Zero”.
https://moslereconomics.com/wp-content/uploads/2018/04/The-Natural-Rate-of-Interest-is-Zero.pdf
The confusion over the difference between “money” (vertical, government type that rarely sums to zero) and “credit” (horizontal high street Bank type, that always sums to zero) has one of its better explanation at http://heteconomist.com/verticalhorizontal-vs-exogenousendogenous/
“Inflation is under control in the UK. The Bank of England thinks the rate is declining and on target.”
This is true for the “official” way that inflation is measured with CPI/RPI.
For many, this measurement is so flawed, it beggars belief that it is still promoted as having any meaning.
Real inflation in those things that we need and have no choice to pay for, CPI and RPI seriously downplay the cost. Often just ignoring the increase.
Inflation is horrendous if you are a renter and for those who took out mortgages in recent years.
For mortgage payers, there would be some relief from lower IR’s.
For renters-nothing.
In fact, lower IR’s will probably lead to further price spikes in house prices, and higher rents. I say that because the history of reducing IR’s in the last 30 years or so, always leads to higher house prices.
Add in all those other need things like energy, gas, electricity, water, travel costs, council tax, broadband/telecoms, etc…
I don’t care if the cpi tells me that the latest gadget that I might never use is the same price as last year, or even cheaper.
I do care that I, and many others, are being ripped off for everything that we need just to live, and that the Govt, Tory or Lab, are silent on this.
Their only answer appears to be more growth, increase wages, and play catch up with inflation.
Unfortunately, that will always mean that many will get left behind.
I’d like to think there is a better way, but I doubt that I will ever see it.
Your points are fairly made
Mar P is spot on.
Shopping both before and after Christmas, I am paying more for nearly everything from a few pence to a couple of quid, and in some case getting less for that increase. There is still rampant price gouging going on and what exactly has our wonderful Labour government been doing about that?
That is also my lived experience.
The following is from the excellent Weber.
https://www.foreignaffairs.com/mexico/governments-survived-inflation
I agree that Bailey and his Inner Circle are unlikely to advocate a sizeable reduction in Interest rates any time soon. Indeed Bailey has doggedly hung on to higher than necessary rates for so long in the mistaken belief that they were restraining inflation, when they were actually contributing to inflation through the unnecessarily high costs of borrowing (mortgages, rents, business overdrafts etc). Judging by his statements in interviews he has no understanding that he and his BoE colleagues are part of the problem, which makes me wonder how he got the job in the first place.
Back on January 10th in a blog here (‘Liz Truss and Rachel Reeves Have a Lot in Common’) I asked the question whether the Governor and other BoE officials responsible for making decisions affecting the UK economy are required to disclose personal income from outside sources (as MPs are supposed to do). Nobody came forward with an answer, but it is surely a relevant question in a country which has a record of inadequate regulatory controls? The UK Government is widely viewed as having been “bought”, so it’s perfectly feasible that the BoE might have been too. And while we’re at it, what was his role in Reeves’ recent trip to China?
It is a good question.
As far as I know there is no such disclosure.
Surely as civil servants they are bound by the Civil Service Code, and the answer to the question should presumably be that they aren’t allowed to have any such financial interests.
If we have an issue with ‘inflation’ what about
1. An inflation ‘tax’ aimed at certain incomes/profits etc working the same way as high interest rates are supposed to work BUT targeted
2. Credit, price and profit controls. Kamala Harris talked about ‘price gouging’ in the US where it is clearly happening, a rent freeze, restrictions on mortgage lending and the use if homes other than for owner occupation etc etc
3. Changing the way that the ‘price cap’ for domestic electricity is calculated to reflect the true cost of the supply
This however requires an ‘activist’ government which we dont have
It is a reminder of the absurdity of voting for a government in a democracy, that it does not have its hand on the levers of power. The absurdity of the situation is this: what our system tell us is that democracy is as a form of government that does not trust government with government.
Very well. But here is the problem. Whom do I trust? A bank? A bank with a poor record of forecasting* Andrew Bailey? A collection of academic economists on a committee, whom all carry no responsibility for their decisions and are not answerable for them; decisions that could wreck your life?
* On close inspection the BoE has a very patchy record over its history (and never receives its just deserts for its manifest serious failures over multiple banking crises, over three centuries), not least in the LDI disaster that cost us £30Bn to fix their oversight blunder only just over twelve months ago? The fact that the incompetent Liz Truss paid the price for that failure, does not excuse the Bank’s failure. The BoE is not up to the job – obviously, and is never, ever brought to account for its failure of the British people.
Wolfgang Streeke writes about the corporate takeover over government, as you describe, creating “independent” bodies, in some cases international bodies, unfettered by any democratic oversight, sold on the idea that this frees them from government “interference” and hence makes them somehow not political – yeah, right – but rather objective arbiters of some common human good that, somehow, always manages to correspond exactly with their own interests and the status quo. Independent could mean citizen’s assemblies selected by sortition, supported by factual information and expertise from academics and so on, as well as by those adept at consensus-building to guide the process, but instead it means the same people from the same shared background and family connections making decisions from elsewhere, what is referred to as decontextualised decision-making or, more colloquially as being given the shaft. “Independence” only means from the grubby hands of those who make the UK a viable place to live. A tiny clique of bankers get to make policy decisions, with near-impunity, that can enrich themselves, what could possibly go wrong?