Bailey fails growth test: Bank needs business-savvy decision-makers, says ALEX BRUMMER

It is inevitable to draw contrasts between the decisive half-percentage point cut in US interest rates and the Bank of England’s decision to keep its base rate at 5 percent.

All sorts of excuses can be made to justify the unwillingness of Governor Andrew Bailey and the rate-setting Monetary Policy Committee (MPC) to act at the September session.

Just for making the Bank communications on your behalf, there are several reasons you could have cited.

He could have said that he had no foresight in the Federal Reserve’s decision to cut rates by half a percentage point, even though the possibility had been in the markets for more than a week.

Or Bailey could have explained that the MPC was holding fire until the Budget, when it would have a fuller understanding of Labour’s fiscal stance.

But unlike Federal Reserve Chairman Jerome “Jay” Powell, the Bank does not have a mandate to target jobs and, by implication, growth.

None of the improvements are good enough. After a good start in 2024, production has stagnated in recent months.

The government (the biggest borrower of all), consumers, mortgage payers and small businesses (at the mercy of predatory banks) all need lower monetary costs.

Moreover, there is absolutely nothing in the minutes of the MPC to suggest that an inflationary hurricane is brewing.

The most obvious threat to price stability – the easy and gratuitous way in which Keir Starmer has caved to above-inflation pay deals in the public sector – gets no mention.

You might think that at least one member of the nine-strong MPC might have expressed concern that rewards to rail workers and junior doctors could influence private sector deals. At worst, this could lead to a wage-price spiral.

On the labour market, the MPC is limited to the perennial complaint that employment data is unreliable and a passing reference to possible increases in the national minimum wage/living wage.

Instead of embracing the optimism of steadily improving consumer prices, policy makers are adopting the harsh language of monetary machismo.

The minutes indicate that the Bank continues to be guided by the need to “eliminate persistent inflationary pressure from the system.”

When inflation soared after the pandemic and reached 11 percent, the CPM maintained a loose monetary policy, arguing that price changes were “transitory.”

What was really happening was a cost-of-living crisis exacerbated by Russia’s war against Ukraine.

Now that prices, including energy prices, have stabilised again and wages are no longer a concern for the committee, the Bank had an opportunity to get ahead of the game.

Just as it was slow to raise rates when they were rising, it is now making the same mistake by lowering them.

All the signs ahead of October 30 are of a tight budget, with tax increases and spending restraint. If there was any doubt about that, Treasury watcher Sam Beckett was in the room.

There are overwhelming arguments for easing pressures on ordinary workers and struggling businesses by lowering borrowing costs.

Dissenting MPC member Swati Dhingra has consistently pointed out that there are “lags” in the time it takes for monetary policy to work, so it is better to be less restrictive now, by cutting another quarter of a percentage point, rather than delaying it.

The only push the Bank has made to ease policy is its decision to reduce its holdings of government stock by £100bn over the next year.

It is very clear that the Bank needs more members of the Monetary Policy Committee willing to think outside the box.

The committee’s newest member, Professor Alan Taylor of Columbia University (a British native and an opponent of George Osborne’s austerity), was expected to support the growth agenda. Perhaps so.

But as future appointments loom, Chancellor Rachel Reeves has a real opportunity to put an end to collective thinking and the apparent Treasury view that the Bank is a comfortable home for former mandarins.

Decision makers with the greatest diversity of opinions and business knowledge should be the priority.