The Bank puts the final nail in the Tory coffin

It kept interest rates too low during the pandemic, and now it is keeping rates too high for far too long ‘No one thinks winning elections is part of its job... It’s not the job of the Bank to lose elections, either’

Halifax has already slashed the rates on all its main products. Leeds followed suit yesterday, and brokers are confident that all the main lenders will bring down their rates over the course of the next week. With forecasts that inflation will continue to keep falling, the cost of money is coming down in the City. Meanwhile, influential business groups such as the Institute of Directors are calling for rates to be cut as quickly as possible. There is just one body that remains unconvinced. Unfortunately, it is the one that matters most: the Bank of England. Its

Monetary Policy Committee is sticking obstinately to holding rates high, even at the risk of a full-blown recession

That looks increasingly likely to cost Rishi Sunak the election – and the Tory Party may not quickly forgive the Bank for its role in its defeat.

As we head into the new year, the economic outlook, while not exactly inspiring, should at least be looking slightly better than it did a few months ago. Inflation tumbled in November to 3.9pc, with price increases coming under control more quickly than pessimists expected.

In response, City analysts are forecasting that interest rates will start coming down at least by March, and have already started to push down the cost of borrowing. For the 1.5 million households on fixed-rate deals due to come to an end this year, the shock of transitioning to a new one will be less painful than they might have feared a few months ago.

Likewise, companies will be under less pressure from their banks and their lenders, enabling them to invest more. As a general rule, when interest rates come down the economy starts to improve; indeed, that is generally the whole point.

In theory, that should come at the right moment for a general election campaign. With a mix of tax cuts in the spring, falling interest rates, and prices stable in the shops, by the autumn ordinary households should be feeling slightly better off.

The Tories won’t exactly be dusting off the slogan that helped Harold Macmillan win in the 1950s – “You’ve never had it so good” – but at least they will be able to point to a modest recovery in living standards. It might not be enough to save Sunak’s premiership. But it could make the result a lot closer than anyone expected.

Here’s the problem, however. There is absolutely no sign that the Bank of England will cooperate. At the last MPC meeting, held only a week before the inflation data was made public, three members extraordinarily voted for rates to go up even higher, while the remaining six voted to keep them on hold. If rates had risen last month, it could have pushed the economy into a full blown recession, forced many families struggling with mortgage repayments into genuine hardship, and pushed companies into completely unnecessary bankruptcy.

As it is, for all the expectations in the City, we still have no real idea when the Bank will start to bring rates down again. Given the hardline stance of many members of the MPC it could well be several more months. Yet that comes at a time when businesses are clamoring for an early cut.

It would not be hard for the Bank to change the narrative. A few dovish comments from Andrew Bailey, the governor, acknowledging that the outlook for inflation had changed, that there was little sign of a wage-price spiral getting out of control, and that it was important to help the economy recover, would confirm that a rate cut was on the way.

Alternatively, the Bank’s chief economist, or one or two members of the MPC, could deliver the same message. Instead, there is a complete silence. The Bank may reduce rates in March or April. Or it may wait until May. It may choose not to cut rates at all, potentially leading mortgage lenders to hike their rates again.

Given that it takes at least six months for a reduction to impact the real economy, even if a rate cut comes, it will probably be too late to help the Prime Minister. It will be October or November before the rate cut starts to make people feel slightly better off, and unless Sunak wants to wait until the very last moment, and interrupt our Christmas shopping with a trip to the polling booths, that won’t be in time to help the Conservative Party.

True, no one thinks that winning elections for the Tories, or any other party for that matter, is part of the Bank’s job. Indeed, one of the main arguments for granting it complete independence from government back in 1997 was to take the politics out of its decision making.

No one wants to go back to the bad old days when chancellors were tempted to cynically slash rates in the run up to the election, only to raise them again a few months after the votes had been counted.

That said, it is not the job of the Bank to lose the election either. It is already clear that it made a major mistake by cutting rates too far, and printing too much money, during the pandemic, and then in delaying raising rates too long to choke off the rise in inflation that was the inevitable result.

Now it looks certain to make an equally grave error in keeping rates too high for too long.

Sir Keir Starmer is probably grateful to have the Bank helping him with his election campaign. It is a powerful ally. But if the Bank does help to wipe the Tories out this year, it can hardly be surprised if reforming an institution that appears to have completely lost its way is high on the party’s agenda when it finally returns to power.