The Bank of England has left Britain open to speculative attack

Telegraph

2 days ago

On Thursday, the Bank of England's Monetary Policy Committee (MPC) lowered the UK's main benchmark interest rate from 4.25pc to 4pc. This headline borrowing cost has now been cut five times since last August, falling incrementally from its post-Covid peak of 5.25pc.
Had I been one of the nine MPC members, I'd have voted to hold the Bank's interest rate where it was. This cut was a significant error, further damaging the UK's policymaking credibility. I fear it will come back to bite us.
Yes, the decision was close – the committee was split five-to-four. With the economy stalled, political and media pressure to try boosting growth via cheaper borrowing was intense. Kudos to MPC members who held firm.
But this rate cut was so off-beam, so difficult to justify, that the strong impression has been created, again, that the MPC as a whole, far from being a highly-expert body collectively committed to keeping inflation as close to the 2pc target as possible, is dominated by careerist operatives ultimately serving their political masters.
After the Covid pandemic, the MPC made countless errors throughout 2021, waiting far too long to raise rates, oblivious to looming price pressures. Inflation subsequently hit a 30-year high, before Russia's invasion of Ukraine in February 2022, with related energy-price fall-out then pushing prices even higher.
UK inflation, again, is high and is rising. The consumer price index (CPI) increased 3.6pc during the year to June, up from 3.4pc the previous month. Headline CPI inflation has been consistently way above 2pc since last October – and shows no sign of falling soon.
The National Institute for Economic and Social Research reckons inflation will rise even more over the coming months, remaining well above 2pc throughout 2026 – driven by food, utility and transport prices. Even the Bank of England just upped its forecast, saying CPI growth will hit 4pc this autumn. Yet the MPC cut rates regardless.
So why can't I find a single compelling reason in the minutes of the MPC's latest deliberations why the majority of members think price pressure will ease anytime soon, let alone fast enough to justify dropping rates, when headline inflation, on the Bank's own figures, it's about to be double the official target.
Wage growth remains elevated at 5pc-plus, which will keep driving inflation. Trade tensions and other global supply chain issues pose further upside risks. Stand-offs in the Middle East and Russia/Ukraine remain highly unpredictable. We could yet endure spikes in the price of oil, gas, grain and/or fertiliser, the soaring costs of which saw inflation peak at over 11pc in the autumn of 2022.
Yes, the UK economy is slowing – but the traditional view that MPC rate cuts energize household spending via lower mortgage rates is outdated. Depleted home-ownership among young adults means just a third of households have a mortgage these days – and around 90pc of those are on fixed rates. Any immediate consumption boost will be marginal.
Anyway, the MPC's job is to focus on inflation. There is no 'dual mandate' to target both prices and output, as at the US Federal Reserve. That's because the pound, unlike the dollar, isn't the world's reserve currency.
Since mid-June, in fact, as data showing GDP contractions in both April and May has emerged, sterling has dropped around 1.5pc against the dollar and 2.5pc against the euro. Thursday's rate cut could soon weaken the pound more, pushing up inflation via higher import prices – an ongoing danger in the UK, now a heavy net-importer of both energy and food.
Following the MPC's announcement last week, the Labour party put a graph on social media showing incremental rises in the Bank of England's policy rate during 2022 and into 2023 'under the Tories', compared to five rate cuts 'with Labour' since the party took office in July 2024. 'Speaks for itself' was the headline. It certainly does – illustrating a woeful lack of judgement regarding economic policymaking.
The Bank of England is supposed to be independent – and at a time when the UK's monetary policy regime is under extreme scrutiny, with financial markets already furrowing their collective brow as to why the central bank of a nation with easily the highest inflation in the G7 is cutting rates, it is deeply damaging for the Government to then claim credit for the Bank's rate cuts.
On top of that, a major reason inflation remains high is the Government's own policies. Labour's higher employer national insurance contributions and above-inflation minimum wage increases have sent business costs soaring – which are being largely passed on to consumers.
Far from borrowing costs coming down under Labour, as the party claims on social media, the interest rates that really count – those dictated by financial markets – have been moving entirely in the opposite direction.
The UK's 30-year gilt yield was 5.32pc on Tuesday, prior to the MPC's announcement.
At the time of writing, it is 5.43pc – significantly higher, despite the Bank's cut. Since last July, Government borrowing costs have gone through the roof, even though the Bank's 'policy' rate has been moved entirely in the opposite direction – a sign of growing financial instability.
So the MPC's unjustified rate cut, far from lowering economy-wide borrowing costs, has pushed them up further, as financial markets sense panic amongst policymakers and dismiss official claims inflation will soon be subdued.
Over the coming months, as Labour's fiscal management falls to pieces, with spending and borrowing spinning even further out of control, yields will almost certainly rise even more.
And as these market rates and the Bank's policy rate continue to move against each other, the gap between them getting wider, that signals trouble, making our sovereign debt and currency more vulnerable to speculative attack.