ALEX BRUMMER: Raising rates prematurely will only intensify upward pressure on household budgets, so Bank of England should hold off!
The Bank of England along with other central banks has been caught cold by the prospect that inflation may be with us for some time.
Previous guidance that the run up in prices is transitory and could be safely ignored as growth and jobs return to post-pandemic normality, has given way to anxiety, focusing on energy prices.
Fears of high unemployment as the Government’s furlough scheme was withdrawn have been replaced by concerns about labour shortages.
Digging in: A modest advance in rates from 0.1 per cent to 0.25 per cent would make consumers more cautious when boldness is desired
Among the reasons why a senior Treasury mandarin attends the interest rate setting Monetary Policy Committee meetings is to ensure a measure of co-ordination in fiscal and monetary policy settings.
Much of the interpretation of Rishi Sunak’s Budget, and his earlier tax hikes this year, has focused on the squeeze on middle income households.
At first blush it looks to have been a budget which tightened fiscal policy.
To the contrary, the lavish spending pledges actually equate to a rise of 0.4 per cent in national output in 2022-23. Or in other words, a fiscal loosening.
In economic terms, that should make it easier for the Bank to begin its battle against inflation by being less accommodative. The big issue is not if interest rates will rise from the historic low of just 0.1 per cent, but when. Will the Bank act at its next meeting on November 4 or hold its fire until December or early next year?
In their inimitable way, the money markets have been doing the Bank’s job for it. Rising yields on government bonds have nudged Britain’s mortgage lenders – among them HSBC and Natwest – to withdraw their best fixed-rate deals.
The notion that there is going to be hardship because most home loan deals below 1 per cent have vanished is not going to provoke much sympathy for those people who bought homes when mortgage rates were in double digits. If history is guidance in these matters, the Bank has been a follower rather than a leader when it comes to monetary matters.
Going too quickly can be as big a mistake as delaying.
Collective memory will recall that when the European Central Bank went first in raising interest rates after the financial crisis, it was forced into a an embarrassing U-turn. It moved too early and recovery stalled.
Consumer price inflation in the US has outpaced that in the UK. Analysts at investment firm Pimco expect policymakers to run down asset purchases, by say $15bn per month, before lifting rates in 2022.
Even if contrary to predictions the Bank holds back next week, the voting should be fascinating. In recent speeches external members Silvana Tenreyro and Catherine Mann have sounded dovish. Tenreyro argued that raising rates to curb supply chain disruptions could be counterproductive.
The Bank’s new chief economist Huw Pill, who has yet to cast a vote, put the cat among the pigeons when he said a rate rise is ‘live’. The governor Andrew Bailey has shown decisiveness when it comes to monetary policy. At the start of the pandemic he cut interest rates rapidly and launched a huge QE offensive. It was never clear whether he acted to preserve financial stability or prevent economic collapse – or probably both.
When Bailey argued this month that the Bank ‘will have to act’, he was reminding us that it is vigilant. All its efforts since Covid have been about preventing scarring.
The mortgage market remains firm but growth in consumer credit is subdued. Even with the approach of the holiday season citizens seem reluctant to go on a spending spree. A modest advance in rates from 0.1 per cent to 0.25 per cent would make consumers more cautious when boldness is desired.
It would do nothing to dampen fuel bills or the cost of petrol. Inflationary expectations, at a moment when the phrase ‘cost of living crisis’ is infecting the public dialogue, might be cooled.
But the reality is that getting out ahead of a crisis which hasn’t happened, and which central banks cannot control, doesn’t make a great deal of sense.
Energy prices are highly volatile and potentially could rebalance in much the same way as queues have vanished on UK forecourts. The price of some raw materials, including iron ore and timber, has halved since the spring.
Raising rates prematurely will only intensify the upward pressure on household budgets. So hold off!