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

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

By getting the timing so wrong, the danger now is that, instead of gently reducing rates in the coming months – as it had hoped to do – the Bank will be forced to have to cut rates salami-style to rescue the economy. of the recession. . Or the worst of all worlds, stagflation.

Cutting rates from a position of weakness, rather than being ahead and in control, is never a good strategy.

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

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

What’s more, the ECB says it will continue to cut, another factor behind the huge spread between UK and German 10-year bond yields, and the rise in UK bond yields to Liz Truss-style levels.

Why then did Bank Governor Andrew Bailey and five other members of 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 in favor of cutting rates by 0.25 percentage points?

The reason is that the Bank remains fixated on inflation, worried that rising prices and higher wage deals will reignite a rise in inflation.

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

The Bank’s experts are trapped in a dangerous zero-sum game. Which is worse? A shrinking economy or a bit of inflation?

The three who voted in favor of a cut did so on the basis that current levels are too high and are restricting business activity. They are right. Even a small cut would have been enough to lift the spirits of both businesses and consumers.

But Bailey thinks it’s the latter, arguing that a gradual approach to lowering interest rates is still the right approach because of “increased uncertainty in the economy.”

That uncertainty has been caused almost entirely by Keir Starmer and Rachel Reeves themselves. The duo have been wrecking the economy since taking office, while the Chancellor’s tax rise slammed the brakes on business activity and consumer confidence.

Surely this is reason enough for the Bank to have been bolder. Having ignored signs of spiraling inflation during the Covid era, MPC members are now too consumed by rising prices rather than looking at the bigger picture.

HSBC economists say we shouldn’t worry too much about November’s higher inflation figure. This was primarily due to Reeves raising taxes on gasoline and tobacco in the budget. And while wages were rebounding ahead of the budget, the increases are now fading.

What a disaster. However, the MPC could easily have argued for a cut. It is mandated to do so as, in its own words, the MPC “sets monetary policy to meet the 2 per cent inflation target, and in a way that helps sustain growth and employment”.

There you have it, in a way that helps sustain growth. Failed.

Trump tariffs

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

Mandelson, like Trump, is a wheeler-dealer and master shapeshifter. Although the former business secretary has been shockingly rude to the president-elect in the past, declaring him a danger to the world, since the election he has gone out of his way to disparage the Democratic campaign, suggesting that much of Trump’s loud rhetoric is just ‘hyperbole’.

Their challenge now is to negotiate a hugely important free trade agreement with the United States, our largest trading partner.

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