ALEX BRUMMER: The Bank of England’s rate rebels were on the money

Strategically, Andrew Bailey and the Bank of England may have felt that there was little

Strategically, Andrew Bailey and the Bank of England may have felt there was little choice but to catch up with the markets and raise borrowing costs by half a percentage point to 5 percent.

After all, inflation has stubbornly refused to fall, as the bank confidently predicted, and Chancellor Jeremy Hunt has given the go-ahead for a flash of steel.

The government knows it’s in the last chance saloon. If rising prices cannot be stopped in their tracks, the disorder in public finances will worsen and the prospect of an economic turnaround will disappear.

Bailey and his loyal and abusive group of followers of the rate-setting Monetary Policy Committee are too late to employ frightening tactics.

There has been a wage explosion under the nose of the Bank, with average weekly wages rising by 7.6 percent over the past three months.

In addition, the rise in official rates is only playing catch-up to the markets as homeowners eyeing mortgage refinancing will know right down to their price.

From the first frenetic day Bailey took over in March 2020, when much of the global economy came to a standstill, the bank has deviated from its core mission of keeping the inflation target in place at all times.

The governor saw himself as the ultimate savior of the economy, devising plans to avoid the scars of corporate life and keeping the money taps wide open.

You don’t have to be a fan of monetarism to recognize that keeping interest rates artificially low over time and pumping extra resources into the economy using the black box of quantitative easing is disruptive.

In fact, Bailey was so focused on supporting manufacturing, employment and businesses in volatile times that he even wrote to commercial banks asking how they might be affected by negative interest rates.

Negative interest rates, used in Japan and the Eurozone, are designed to encourage banks to lend and boost production rather than hoard cash.

A reading of the Bank’s monetary policy summary reveals a subtle change of language.

In May, the Bank noted that it had deviated from its mandate to deal with “a series of very large and overlapping shocks,” such as Covid-19 and Russia’s war against Ukraine. In the June report, language about responding to such events has disappeared.

It is an admission that while it is important to act in emergencies, it is a fundamental mistake to set aside the inflation target for long periods in favor of loose money.

Treasury ‘groupthink’ in the Monetary Policy Committee led to a delayed and weak response to rising inflation, long after it was clear that price increases were not transient, and it was feared that the MPC could be wrong again.

Determined to prove decisive in the face of stubborn consumer prices, rising costs in services and rising core inflation, it has panicked and gone a step too far.

It’s no coincidence that it’s largely bank insiders, most of whom served in the Treasury (and Goldman Sachs!) who supported a half point rise.

By doing so, the Bank risks driving up interest rate expectations even further and inflicting far more pain than necessary. Indeed, it fuels Labour’s crass suggestion of a Tory interest rate.

Keir Starmer and Rachel Reeves, a former Bank of England insider, can’t have it both ways.

They declare allegiance to the Bank’s mission and independence (a Labor creation, after all), while blaming the government for the extra costs resulting from the Old Lady’s failure to control inflation.

Starmer and colleagues are partly to blame for their refusal to condemn the damaging rail, postal and public sector strikes that saw workers seeking 1970s-style deals to quash inflation .

My sympathy goes out to the two female dissenters on the interest rate committee, LSE economics professors Swati Dhingra and Silvana Tenreyro.

They voted for no change. It was argued that the energy price shock will reverse in 2023 and that delays and delays in the way monetary policy works mean that the effects of the 13 consecutive increases in borrowing costs have not had enough time to work.

A break may have been politically awkward. But it could have prevented the suffocating optimism and flare-up of recovery.