The Bank of England has blinked. Despite reams of evidence that inflation is on the rise and going to get worse, despite hints from officials that their mindset was starting to change, the nine-member panel that determines monetary policy couldn’t bring itself to pull the trigger on a base rate rise. The benchmark rate of interest remains pinned to a three-centuries low of 0.1 per cent. The extra stimulus of the QE bond-buying programme will be carried on.
There were always going to be reasons to delay biting the bullet. Growth is slowing. We haven’t seen enough hard evidence about how the withdrawal of furlough is affecting hiring intentions. There is still a case that the cost pressures that are forcing firms into price rises are temporary only and that bottlenecks in the supply chain will gradually be ironed out as the economy starts to get back to normal.
A lot of the work of raising the cost of credit a bit has already been done simply because of changing expectations in financial markets. Banks haven’t been waiting for the officials to move, but are already pushing up borrowing rates on new mortgages, for example.
And there is still a risk, as we head into winter, that an adverse development in the pandemic will force a fresh round of restrictions on travel and in workplaces that could quickly kill this economic recovery and make any policy tightening look over-hasty.
But there is a serious cost to this reluctance to raise rates: a growing unease among some that Threadneedle Street is not really serious about meeting its target of keeping the rate of inflation as close as possible to 2 per cent in the medium term. That target is meant to be symmetric: the Bank is supposed to be just as keen to raise rates when inflation is above target as it is to cut them when it is below. Even the Bank itself accepts that inflation will now peak at 5 per cent in April.
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Within days of the pandemic hitting in March 2020 the Bank rightly scrambled to slash rates twice in quick succession. There just doesn’t seem to be the same haste to raise them as the danger recedes and inflation perks up. The danger is that inflation expectations start to become embedded in business thinking, triggering a vicious circle of wage and price rises.
Outside Threadneedle Street there has been a significant hardening of views in the past few months. The Times’s own informal “shadow monetary policy committee”, which is made up of eminent economists including ex-Bank of England staffers, voted this week eight to one to lift rates. Traders too were mostly expecting a modest base rate rise or at least a tapering of QE.
A small rate rise would have sent a crucial signal that the Bank is serious about trying to tackle the coming bulge in price rises. The credibility of the Bank and its governor, Andrew Bailey, is now on the line.
