Whilst I was out yesterday, the Bank of England offered its opinion on the economy.
Inflation is not as low as they would desire. The same is true everywhere. No action they can take will change this in that case. This should, therefore, have no influence on interest rate policy.
Growth is low and getting worse. Action they could take would change this. If only they would cut rates significantly, the UK economy would get a significant boost as many imperilled households would have the confidence to spend again. They must know that. Doing so, they delivered a feeble cut in their base interest rate of just 0.25%, leaving our rate massively out of line with the eurozone and far too high.
As has been the case for some years, the Bank of England has seriously misread the economy and what is required of the Bank as a result. In the context of the threat from Trump, a world economy that is lacking confidence, and domestic pressure precisely because interest rates are far too high, the Bank got things even more wildly wrong than usual yesterday.
My message is one with which many will be familiar from their school days. They could try harder.
It does, however, seem that they have no inclination to do so. The argument for the abolition of their supposed independence, which status has been so destructive since Covid, grows by the day.
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My heart sank when Bailey started talking about productivity on C4 news last night – I think that Cathy Newman gave him an easy ride and I was nearly sick at the end when he told her (with a creepy smile) that it was ‘nice to see her’. Obviously he thinks that even the marginally better Helia Ebrahimi is too pushy for him.
Nice work if you can get it for what is it – £600K a year Andrew!
Mummy must be very proud.
Agreed
Newman needs to treat him the way she does bishops
It was weird watching the newly slimmed down Andrew Bailey last night, he looked much more steely eyed and efficient. I preferred him when he looked more like a self satisfied fat cat.
Ha Ha!
I can just imagine him trying to play footsie with Ms Newman emboldened by his new weight-watchers self!!
It seems that John Van Reenen’s obsession with productivity has infected the Bank of England too. Apparently nobody has paused to consider that improving productivity normally requires both functional public infrastructure and private investment (in either training or equipment). Austerity damages infrastructure, and high interest rates discourage private investment. Current policies are therefore doomed to fail.
If I may add something to the comment: traditionally it has been government which has facilitated training – which requires facilities/investment (who trains the trainers?) etc.
Thus Bailey’s talk about “productivity” is meaningless absent gov investment. The appearance on C4 with the Newman cipher was a bit of propaganda, steady the troops, tell the politicos what to think, show UK serfs that it is all under control, etc, A real interview, with an interviewer that forensically destroyed what underpins his sound bites would leave Bailey in tears. Just imagine if this was a condition of holding such a post – that your thinking was disected – in public.
Cathy Newman never tries that with him.
Given the comments from Col Smithers, I wonder if Reeves knows that the BoE despises her? Is there any hope that the worm will turn? Given she could, simply instruct them.
Probably not. Like Osborne-the-moron, she probably has a very high opinion of herself and is greeted everywhere with warm obsequious words, and would never, ever think of reading this blog.
The Chinese bust inflationary pressures on their currency and thereby they increasingly grow their lion’s share of the world’s manufacturing output by imposing an inflation tax on their exporters and using that tax to buy the treasury bonds of countries that buy their exports thereby pushing up the value of those country’s currencies. Since we know from MMT that fiat currency governments create their own currencies and don’t need to fund their spending by the issue of treasury bonds it would seem possible to see the issue of treasury bonds held abroad (and perhaps to some extent held internally) as a means to directly reduce taxation on one’s own country’s businesses especially manufacturing. You may or may not buy this policy but it helps to point out why an “independent” central bank is such a nonsense since the interest rate on treasury bonds should be kept as low as possible by the treasury.
I need to think about that
Reeves seems to crave acceptance by the City. Bailey like all City grandees “knows what’s best for the UK”.
None of the City and its economists are looking at the real world.
Take the Speke site for AstraZeneca. A UK company valued at £183bn with annual sales, $54bn, profits $8.7bn, is not able to build the new facility because Labour rdeclined to give it a £78m subsidy.
What does that show? The private sector is very unlikely to “invest in economic growth” unless it gets public money.
Moral? The UK state really does has the power to drives growth by investing in the UK.
Reality of the combined Reeves/Bailey line? A recession.
Hi Richard (or anybody else),
A hopefully quick question:
Which government account does the money to pay interest on uk gilts, come from?
I’m wondering if it is newly created (a la QE) or is from taxes.
Best regards,
C.
It is newly created, as is all government spending.
Reeves gets up tomorrow morning. She could, without any great effort, order Andrew Bayley to stop destroying the economy, end QT, &lower interest rates, (or find another job), she could restore Winter fuel payment, reverse the NI changes, end higher rate pension contribution relief, take over some struggling rail franchises and Thames Water, finance a public vaccine company, finance a pilot solarPV/battery scheme on some council houses,
OR,
stuff all that, just deliver a speech about a 3rd Heathrow runway in a decade or so to help Scotland’s salmon & whisky exports, because…. growth (or something).
It’s what SHE would call “a difficult decision”.
Hi Richard
Can you explain why the BOE increased interest rates in order to curb inflation in 2022 when the inflation was due to supply side issues (energy price increases etc) and not due to excessive demand? If you think this was the wrong approach, what would you have done if you were given the task of managing interest rates?
A) Dogma, coupled with ignorance.
B) See https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018 The rate during the inflation era should have left constant. Now, it should be a real rate of about 0.5% at most.