MAGGIE PAGANO: The Bank’s mixed messages on interest rates
Difficult language: bank boss Andrew Bailey
What the hell are they doing on Threadneedle Street? The day after the Governor of the Bank of England indicated that the Old Lady could take a ‘more aggressive’ stance on cutting rates, comes the chief economist to warn that rates should not be cut ‘too far or too fast’ .
The contrast in tone between Andrew Bailey, the governor, and Huw Pill, his right-hand man and chief economist, is remarkable. On the one hand, Bailey said in his newspaper interview that the economy has proven much more resilient than expected, and is now able to handle lower interest rates, assuming inflation remains stable.
Bailey’s comments were not only more optimistic about the overall state of Britain, but were also surprising, as he is not known for grand gestures or loose talk. He would have known that words like ‘aggressive’ and ‘activist’ would have a significant impact on the interest rate markets and also on sterling. Whatever they did, the pound fell.
Then, just 24 hours later, Pill made a complete U-turn, telling his audience at the Institute of Chartered Accountants in England and Wales that there was “ample reason for caution” in assessing the extent to which inflationary pressures had eased. This in turn would influence how quickly and by how much financing costs would have to fall.
“To me, the need for such caution points to a gradual withdrawal of monetary policy restrictions,” he said, “which will bring inflation back to target while avoiding volatility in economic activity and employment.”
Pill’s tone was fundamentalist, if not evangelical. He further pointed out that achieving price stability is not merely a ‘legal and institutional obligation for members of the MPC. It’s the right thing to do. We are concerned with price stability.’
That’s tough love. Pill’s extremely cautious attitude is important. He was one of four members of the nine members of the Bank’s Monetary Policy Committee who voted against the quarter-percentage-point cut in August.
In any case, we cannot accuse the governor or his economist of groupthink, the usual criticism of the central bank’s approach to monetary policy. It is healthy for there to be discussion. Many of us disagree with both and argue that in May the time was already ripe for an interest rate cut. Hopefully Bailey can convince Pill – who is often wrong – and other MPC members that he is right. Let the battle begin.
Bricks and mortar
There are also conflicting messages coming from the construction sector. New figures from S&P Global show the sector is going gangbusters.
Civil engineering showed the strongest performance, supported by demand for sustainable – and subsidized – energy projects. Commercial construction is also increasing, while residential construction is said to be growing at its fastest pace in two and a half years, thanks to lower interest rates and Labor’s pledge to build more homes.
That’s the good news. But it’s not what I hear from architects and builders on site. They say construction projects – large and small – have come to a standstill in recent weeks, especially in the Southeast.
The head of a major London architectural firm says the atmosphere reminds her of the John Major years.
Builders she hasn’t heard from in years call out of the blue, so desperate are they for work. And the mood has become more somber since the Chancellor turned on the doom and gloom taps with threats of higher taxes. Potential clients, she says, have put projects on hold, waiting for the budget before making any decisions. Or move to Switzerland. Trust is fragile and easily lost, as Rachel Reeves will find out at her cost.
Scrap stamp duty
Abolishing stamp duty on UK listed shares is a no-brainer to revive our struggling public markets.
It is one of the many reforms that the Investment Association has submitted to the Ministry of Finance for its pension review. Because abolishing the tax is such a sensible move, you can be sure the Chancellor will ignore it.
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