Those who listened to Andrew Bailey’s recent statements could not help but feel that he considers the battle against inflation in Britain won.
High prices in the UK are a direct consequence of supply chain blockages and a shock to energy prices.
It is encouraging that, despite continued union agitation for double-digit pay rises, the UK has managed to avoid a wage price spiral, except among greedy executives in the country’s boardrooms.
Furthermore, although the money supply accelerated with the Bank’s quantitative easing bond-buying program during and after the pandemic, it is declining.
The Bank of England’s May 2024 monetary policy report records “recent weakness in household monetary growth”.
Too cautious? Bank of England Governor Andrew Bailey is chairman of the monetary policy committee that sets interest rates.
The buildup of monetary expansion caused by Covid-19 (never, by the way, as large as that of the United States) has been reversed.
There is little reason for the Bank to keep its key interest rate at 5.25 percent any longer.
This has been the view for several months of LSE associate professor Swati Dhingra, who has consistently worried that monetary tightening is overkill.
Significantly, she was joined at the May meeting by former Treasury mandarin and Bank deputy governor Dave Ramsden, who sought an immediate quarter-percentage-point cut in the bank rate.
The Governor of the Bank finds himself in a curious situation. Bailey is the chairman of the monetary policy committee (MPC) that sets interest rates and the leader of the group.
There are cases of central bank governors who have been defeated by their colleagues.
But if Bailey had strongly advocated for an immediate rate cut – rather than a cut “maybe in June” – he might have been pushing for an opening.
There are always reasons to delay. In 2021, when consumer prices rose, the Bank was nervous about raising rates and pushing the economy into recession.
It was a mistake because it could have prevented a serious reduction in the cost of living.
Now a soft landing has been achieved and the old lady has the opportunity to get ahead of the curve.
The reason for doing so is in the minutes of the MPC meeting. Seven committee members felt that “the restrictive stance of monetary policy was weighing on activity in the real economy.”
Almost all surveys show that, despite high interest rates, Britain is in an increasingly better position. The services sector, the driving force of UK manufacturing, is strongly driven by financial and business activity.
Construction is coming out of the doldrums and the housing market is recovering, as reflected by mortgage approvals. Manufacturing is also improving.
The return of confidence to the British hospitality sector, with Heineken pulling its shuttered pubs out of cold storage and Wetherspoons reporting a Guinness boom, suggests an economy purring again.
What is notable is that the scars have been minimized. There is no large-scale unemployment, nor is the landscape dotted with corporate collapses.
The closure of high streets is largely a consequence of structural change, the rise of online shopping and a distorted business rates system, but has little to do with macroeconomic conditions.
So why is the Bank so cautious?
Naturally, due to strong trade and financial relations across the Atlantic, the UK is keeping an eye on what the US central bank, the Federal Reserve, is doing.
Federal Reserve Chairman Jay Powell is concerned that inflation, fueled by strong demand for goods and services, refuses to be controlled and still shows no inclination to lower rates.
The concern is that if the UK makes cuts, the pound will fall further against a strong dollar, causing prices for imported goods denominated in US currency to rise, particularly energy. Nobody wants what is perceived as a sterling crisis. Restoring growth and breaking out of stagnation should be the priority.
The best way to revive prosperity and improve public services is by increasing production and tax revenues.
The Bank had the opportunity to change the dynamic but lacked the determination to do so. Next month you should start reducing borrowing costs for the sake of consumers, homeowners and businesses.