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Tough talk: bank boss Andrew Bailey
What the hell are they doing on Threadneedle Street? The day after the Bank of England Governor signaled that the Old Lady could take a more “aggressive” stance on cutting interest rates, comes the chief economist warning that rates should not be cut “too far or too much.” fast”.
The contrast in tone between Andrew Bailey, the governor, and Huw Pill, his right-hand man and chief economist, is notable. On the one hand, Bailey said in his journalistic interview that the economy had proven to be much more resilient than expected and is now in a position to handle lower rates, assuming inflation remains stable.
As well as being more optimistic about the UK’s overall situation, Bailey’s comments were surprising as he is not known for making grand gestures or speaking freely. You would have known that words like “aggressive” and “activist” would have a significant impact on the rates markets and also the pound. Which they did, causing the pound to fall.
Then, just 24 hours later, Pill went full hawkish, telling his audience at the Institute of Chartered Accountants of England and Wales that there was “every reason to be cautious” in assessing the extent to which inflationary pressures had cooled. This in turn, he said, would affect how quickly and how much borrowing costs should fall.
“To me, the need for such caution points to a gradual unwinding of monetary policy tightening,” he said, “which will guide inflation back to its target, while avoiding volatility in economic activity and employment.” .
Pill’s tone was fundamentalist, if not evangelical. He went on to note that achieving price stability is not just a “legal and institutional obligation for MPC members.” It’s the right thing to do. “We are in the business of price stability.”
That’s tough love. Pill’s ultra-cautious stance is important. He was one of four members of the nine-member Bank’s Monetary Policy Committee who voted against the quarter-percentage-point cut in August.
At least we cannot accuse either the Governor or his economist of groupthink, the usual criticism leveled at the central bank’s approach to monetary policy. It is healthy that there is debate. Many of us disagree with both, arguing that it was time to cut rates in May. Hopefully Bailey can persuade Pill – who is often wrong – and other MPC members that he is right. Let the battle begin.
Bricks and mortar
There are equally mixed messages emerging from the construction industry. New figures from S&P Global show that the sector is triumphing.
Civil engineering showed the best performance, driven by demand for renewable (and subsidized) energy projects. Commercial construction is also rising, while housing construction is reported to be growing at its fastest pace in two and a half years thanks to lower interest rates and the Labor Party’s promise to build more homes.
That’s the good news. But that’s not what I hear from architects and builders on the ground. They say construction projects, large and small, have come to a standstill in recent weeks, especially in the Southeast.
The director of a large London architecture firm says the atmosphere reminds her of the mid-John Major years.
Builders you haven’t heard from for years are calling out of the blue, so desperate are they to find work. And the mood has become bleaker since the Chancellor turned on the taps of pessimism with threats of higher taxes. Potential clients, he says, have put projects on hold, waiting for the Budget before making decisions. Or move to Switzerland. Trust is fragile and easily lost, as Rachel Reeves will discover to her cost.
Scrap metal stamp duty
Abolishing stamp duty on UK-listed shares is a no-brainer to revive our struggling public markets.
It is one of many reforms the Investment Association is submitting to the Treasury for its pension review. As scrapping the tax is such a sensible move, we can bet the Chancellor will ignore it.
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