Keep an eye on interest rates: If the Bank of England insists on playing hardball, it could backfire, says MAGGIE PAGANO
The Bank of England is about to make another terrible mistake today by raising interest rates by a quarter of a percentage point to 4.5%.
Barring a last-minute pirouette — something the Old Lady is not known for — the Monetary Policy Committee (MPC) will almost certainly raise rates for the 12th consecutive time in what has been the most aggressive monetary policy tightening in decades .
Just as the Bank of England allowed inflation to spiral out of control by not raising interest rates fast enough, there is now a danger that inflation will accelerate too quickly at a crucial time when the money supply is falling sharply, a clear sign that inflation is at its peak. fall is. .
As monetary policy takes a long time to penetrate the real economy via higher interest rates, there are fears that by raising interest rates again, the Bank will tighten demand in a fragile economy.
Hasty move: The Bank of England is expected to raise interest rates by a quarter of a percentage point to 4.5%
Rather than applying further pressure, the Bank should take a deep breath and assess the impact of higher interest rates before acting rashly.
And they bite hard: 4 million households will have to pay more for their mortgage this year, which will dampen their own purchasing power.
Early fears that roaring inflation would lead to a wage spiral have not materialized, yet another reason to pause.
Lloyds Bank recently reported an increase in defaults and payment delays in the first few months of the year, while a Which? Research estimates that 700,000 households missed rent or mortgage payments in April. The potion works.
While food inflation is still stubbornly high, there are signs that prices are falling globally.
This was confirmed by yesterday’s US CPI inflation data showing that prices rose less than expected for April, suggesting that the Federal Reserve will stop raising interest rates next month.
Wherever you look, wholesale prices for energy, commodities and food are alive after the supply chain problems created by the lockdown and the shock waves of the war in Ukraine. Now that China’s massive economy is open for business again, those lockdowns should ease even further.
There is another important reason for the Bank to slow down: the recent bank failures in the US and the resulting tensions in the sector have yet to play out and further liquidity withdrawals could follow.
Indeed, the Institute of Economic Affairs think tank is concerned that since the Federal Reserve now pays interest on deposits, it is contributing to a liquidity shortage in the economy.
A further rise in interest rates would fuel more bank failures and call for more quantitative easing.
Most disturbingly, because the MPC took so long to act, its members are now obsessed with hitting inflation on the head with the wrong tool, one that can do more harm than good.
Groupthink does not lead to good policy making, whatever part of the cycle it comes in.
They should listen to Donald Kohn, a former Fed and Bank of England policymaker, who this week told the House of Lords’ Committee on Economic Affairs that central bankers must break the stranglehold of Keynesian economics in order to end groupthink that may have been partly responsible for the delayed response to skyrocketing inflation.
Instead, bank officials should be willing to challenge conventional wisdom and question historical models. MPC members would have done well to read his evidence prior to today’s announcement.
Playing hardball now can only backfire.
White survives
As Dame Sharon White has discovered, questioning the sanctity of the John Lewis Partnership as an employee-owned company was viewed by staff as the ultimate betrayal. And so it was.
But her promise that the partnership will remain employee property — “no ifs, no buts” — seems to have won the day.
Still, it was a mixed victory: she lost the partners council’s first vote, on whether they have confidence in her decisions over the past year, but won the second, on whether they have confidence in her leadership.
The votes are not binding, but the council can dismiss the chairman ‘in extremis’.
She looks safe for now.
Moby Dick
National Express Chief Honcho Ignacio Garat is changing his name to Mobico because it “better represents our multimodal operations, global reach and future aspirations.” No it doesn’t, I’m sorry.
Mobico sounds more like a gas station or a mobile app than a coach company.
And too close to Moby Dick for comfort.