MAGGIE PAGANO: Bank of England is wrong again on interest rates

Missed a trick: bank boss Andrew Bailey

Once again the Bank of England has missed a trick by not cutting interest rates earlier this week, a mistake that may well come back to haunt the Old Lady.

By getting the timing so wrong, the danger now is that, rather than cutting rates gently in the coming months – as it had hoped – the Bank will be forced to cut rates salami-style to prop up the economy. save recession. . Or the worst of all worlds: stagflation.

Cutting rates from a position of weakness, rather than leading the way and maintaining control, is never a good strategy.

That is why the Monetary Policy Committee’s decision to keep interest rates at 4.75 percent is all the more bizarre because it also goes against the global trend.

Both the US Federal Reserve and the European Central Bank (ECB) have been more aggressive, recently cutting interest rates to stimulate growth and avoid a recession.

Moreover, the ECB says it will continue to cut spending, another factor behind the huge spread between UK and German 10-year bond yields, and the rise in UK government bond yields to Liz Truss-like levels.

Why then did Andrew Bailey, the Bank’s governor, and five others on the nine-member Monetary Policy Committee (MPC) not budge on rates? And why is there such a divide, with three members – Swati Dhingra, Dave Ramsden and Alan Taylor – voting to cut rates by 0.25 percentage points?

The reason for this is that the Bank remains fixated on inflation, fearing that rising prices and higher wage agreements will fuel a new rise in inflation.

But at the same time, the Bank is nervous about the broader economy, warning that the country has come to a standstill and cutting its growth forecast for the latest quarter to zero from 0.3 percent.

The Bank’s techies are stuck in a dangerous zero-sum game. What’s worse? A shrinking economy or a bit of inflation?

The three who voted for cuts did so because current levels are too high and business activities are being limited. They’re right. Even a small cut would have been enough to improve the mood of both companies and consumers.

But Bailey believes the latter is the case, arguing that a gradual approach to lowering interest rates remains the right approach due to “heightened uncertainty in the economy.”

That uncertainty was almost entirely caused by Keir Starmer and Rachel Reeves themselves. The duo have devastated the economy since coming to power, while the chancellor’s tax hike dampened business activity and consumer confidence.

That is certainly reason enough for the Bank to have been braver. After ignoring the signs of the inflationary spiral during the Covid era, MPC members are now too preoccupied with rising prices instead of looking at the broader picture.

HSBC economists point out that we should not worry too much about the higher inflation rate in November. This was mainly due to Reeves increasing taxes on gasoline and tobacco in the budget. And while wages rose faster than the budget, the increases are now disappearing.

What a mess. Yet the MPC could so easily have defended a cut. It is mandated to do this as the MPC, in its own words, ‘sets monetary policy to achieve the 2 percent inflation target, and in a way that helps support growth and employment’.

There you have it – in a way that supports growth. It failed.

Trump the tariffs

If anyone can talk his way through Trump’s court at Mar-a-Lago and Washington DC, it’s the Prince of Darkness, aka Lord Mandelson. His appointment as Britain’s ambassador to the US is one of Starmer’s smarter moves, and there haven’t been many.

Mandelson, like Trump, is both a wheeler-dealer and a master shapeshifter. Although the former Secretary of State has been terribly rude about the President-elect in the past and declared him a danger to the world, he has gone out of his way to bungle the Democratic campaign since the election, suggesting that many of Trump’s loud rhetoric is just nonsense. ‘hyperbole’.

His challenge now is to negotiate a hugely important free trade agreement with the US, our largest trading partner.

Trump has already indicated that Britain will not be subject to high tariffs, and that he expects trade with us to increase “three to four, five times” current levels. Mandelson may have met his match.

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