Voices: Doves v hawks: Has the Bank of England raised interest rates high enough?

·5-min read

It could have been worse and arguably, it should have been. The Bank of England’s Monetary Policy Committee (MPC) opted to increase base rates to 2.25 per cent – a 0.5 per cent rise – at the conclusion of its September meeting. They haven’t been this high in 14 years.

However, a substantial chunk of the City, not to mention your correspondent, expected the MPC to go further by pushing them up 0.75 per cent to 2.5 per cent.

Central banks tend to move in packs and the big two, the European Central Bank and the US Federal Reserve, both plumped for 0.75 at their most recent pow wows. The Fed’s move, earlier this week, was its third straight 0.75 per cent rise, sending the Dollar up to the moon. Perhaps partially in reaction to that, Sweden, in the EU but not the Eurozone, and Canada went further still, adding a whole percentage point to their respective rates.

Back home, UK inflation remains very high. Even if it dipped a bit in August, (to 9.9 per cent) the figures are expected to head north again next time. The pound is also as weak as a kitten, a contributing factor because this makes imports much more expensive.

Despite all this, the interest rate doves were cooing over Threadneedle Street. A recent change to the committee’s membership appears to have helped push it further in that direction.

Over the most recent cycle, three of the MPC’s external members have consistently favoured a more aggressive, hawkish approach to curbing inflation: Catherine Mann, Jonathan Haskell and Michael Saunders. The first two both voted for 0.75 per cent rises this time.

Saunders’ term has, however, ended. His replacement, Swati Dhingra, an economics professor at the LSE, voted for a rise of just 0.25 per cent, creating a three-way split in the committee. The Bank’s in-house team saw Dave Ramsden breaking ranks to join the hawks by voting for 0.75. The remaining five members, four in-house, one external, backed 0.5 per cent, carrying the day. They were clearly worried about the impact stronger medicine may have had on an economy the Bank says is already in recession.

We can probably take that as read. To meet the official definition, an economy has to contract for two connective three-month quarters. Britain’s second saw a 0.1 per cent decline. While we are still in the third, the MPC has more than enough information to hand to make an early call.

Ideally, central bankers like to be in a position to cut rates moving into an economic downturn to give the economy the fuel it needs, in the form of cheaper credit, to power out of it.

The current inflation means that the MPC is in the deeply uncomfortable position of having to do the opposite. This explains Dhingra’s dissenting vote. Her concern was that the economy is already weakening to such an extent that anything more would be too much for it to take.

It might not seem like it, but with their 0.5 per cent rise, the majority of the committee opted for what amounts to something of a holding pattern ahead of the new chancellor Kwasi Kwarteng’s forthcoming tax-cutting, debt-hiking mini-Budget.

Kwarteng’s boss, Liz Truss, has argued that cutting taxes is the best way to help people through the current cost of living crisis. Some £30bn worth of them are expected, without any official scrutiny from the Office for Budgetary Responsibility. It has been left on the sidelines – not a good sign.

The non-partisan Institute of Fiscal Studies has been hard at it, however, reacting almost as if it’s watching the economic equivalent of a video nasty playing out on a large screen outside its offices.

The trouble with such an aggressive fiscal loosening at a time when borrowing is getting much more expensive for the chancellor is that, as the IFS has pointed out, it may very well fail to deliver the growth Kwarteng and Truss are hoping for, while stoking the inflation it is supposed to help people deal with.

The government’s plans also look set to help the richest the most, while the current wave of price rises is hurting the poorest the most. How very Tory.

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Against that backdrop, the MPC’s job will be to pick up the pieces. There may be a lot of broken pieces to pick up. No one ever said a central banker’s lot was a happy one.

It is a racing certainty that the hawks’ number will be added to in future. More rises are coming, and perhaps bigger ones too. That is bad news for the economy.

Let’s talk about another bird now: pigeons. When they come home to roost, it will be the Bank and the MPC that the government blames. The stitch up is, in fact, already underway. “The Bank of England kept printing more money last year, stoking inflation. There is a danger they now hike rates too much, creating an undesirable recession. They need to monitor and control money and credit, not punish us for their past errors,” tweeted senior Tory MP Sir John Redwood.

The MPC should not be free from criticism. But with that tweet, Sir John was conveniently ignoring the past economic errors of the government he supports and failing to address the dangerous games it is playing. He was, in fact, lobbing bricks from a glass house with paper-thin walls.