Is Bank Governor making another big mistake?

Experts fear Andrew Bailey is delaying recovery by being too slow in loosening monetary policy, writes Szu Ping Chan

‘It makes business less profitable, and it gives individuals less disposable income, all of which reduces growth’

‘The Bank tightened the screws too much, which is squeezing growth – so it should cut rates more quickly than it plans’

Andrew Bailey believes interest rate cuts are on the way – just be patient. “Inflation has come down, and come down as we expected,” the Governor of the Bank of England said yesterday as policymakers held interest rates at 5.25pc.

While Bailey said it is still too early to declare victory over inflation, he added: “I do want to give this message very strongly. We’ve had very encouraging and good news. So I think we can say we’re on the way.”

But talk is cheap in the City, and many believe the Bank is once again behind the curve. Just as the Old Lady of Threadneedle Street was slow in spotting signs of the economy overheating, the danger now is that the Bank leaves it too late to reduce the cost of borrowing, inflicting unnecessary pain on the economy.

“Various indicators of inflation suggest that the job is already done,” says Martin Beck, chief economic adviser to the EY Item Club, a UK forecasting group. “And so the case for keeping policy on hold has weakened and it’s imposing an unnecessary drag on the economy.”

The Bank’s reticence is also raising hackles in Westminster, where Rishi Sunak has bet his political future on an improving economy and better household finances over summer.

“[The Bank] should be moving now rather than saying, ‘Well, we’re waiting for absolute confirmation’,” says Tory backbencher Sir Jacob Rees Mogg.

Waiting will put more strain on public finances by keeping government borrowing costs higher for longer. Sir Jacob, a former business secretary, adds: “It makes businesses less profitable, and it gives individuals less disposable income, all of which reduces economic growth.”

Inflation is falling fast and is expected to hit the Bank’s 2pc target within months, down from 3.4pc today.

Supermarkets are confident that steep food price rises are a thing of the past, while inflation in other parts of the consumer shopping basket is returning to “normal”, according to a Bank survey. The pace of wage increases, a key concern for officials at the Bank, is also slowing.

“The large month-on-month rises in pay in the first half of 2023 will drop out of the annual measure over the next few months, meaning that headline wage growth should come down quickly by the summer,” says Beck. “On a three-month-on-threemonth annualised basis, growth in private sector pay in January stood at 3.3pc.”

Beck believes the Bank’s Monetary Policy Committee (MPC) “may find it challenging to maintain a no-change position” for much longer: data over the past three months suggest prices have barely budged.

Analysts at Citi are also expecting a “screeching reversal” as the case for rate cuts builds globally. Swiss policy makers surprised the world yesterday by becoming the first major central bank to cut rates. They reduced borrowing costs by 0.25 percentage points to 1.5pc, triggering what is likely to be a flurry of cuts globally this year. The US Federal Reserve signalled that three rate cuts remain on the cards this year, while the European Central Bank (ECB) is also closer to loosening policy.

The nine members of the UK’S MPC are now more united than they have been at recent meetings in the conviction that the next move for rates will be down. But they’re far from singing from the same hymn sheet.

In one corner is Swati Dhingra who wants to cut rates now. She has consistently been the most cautious MPC member, calling for rates to be held ever since they reached 3pc in November 2022. She is concerned that consumer spending has not recovered to pre-pandemic levels in “sharp contrast to some other advanced economies where it is driving economic growth”.

For her, the economic outlook remains weak. Vacancies are falling and so are future indicators of pay growth. The minutes of yesterday’s meeting suggest that Catherine Mann and Jonathan Haskel believe wage growth remains “too high” and will “moderate only slowly”.

All nine members remain concerned about persistently rising prices in some corners of the economy. Bailey noted services inflation remains above 6pc. That’s a concern when around half of what the average Briton spends their money on are services, such as haircuts, travel and entertainment.

“We still have some way to go, particularly with what I call the more persistent bits of inflation,” Bailey said.

But in seeking to stamp out every last ember of inflation, Bailey and his colleagues risk snuffing out the green shoots of growth.

“The Bank tightened the screws too much, which is squeezing much needed future growth,” says Carsten Jung, an economist at the IPPR think tank. He highlighted the faster than expected fall in inflation in February as evidence that the damage has already been done. “The Bank should thus cut rates more quickly than its current plans,” he says. “The tightening stance by both the Chancellor and the Bank of England contribute to the UK’S growth falling far behind America’s fast recovery.”

Suren Thiru, economics director at ICAEW, adds: “The Bank remains overly cautious ... increasing the risk they prolong our economic struggles by keeping policy too tight for too long.”

Sir Jacob is even more damning: “They have been too slow. Inflation is a lagging indicator, therefore you need to move interest rates prior to the complete move in inflation, otherwise you’re too late. This is why they were too late putting rates up because they didn’t realise there were inflationary pressures.”

A predicted drop in the energy price cap next month should on its own be enough to push inflation towards the 2pc target, Sir Jacob says.

Investors now believe it will cut rates three times this year, from 5.25pc today to 4.5pc by December. But the Bank’s perceived foot-dragging means anxiety is high.

Asked to evaluate the Bank’s record on interest rates over the past two years, Sir Jacob recited the words of hymn writer Isaac Watts: “’Tis the voice of the Sluggard: I heard him complain,/‘you have wak’d me too soon, I must slumber again’.”

But the couplet after Sir Jacob’s recitation is perhaps prescient: “‘A little more sleep, a little more slumber,’/ Thus he wastes half his days and his hours without number.”