The Daily Telegraph - Saturday
Bank official hints at rate shift as economy stalls
Threadneedle Street hawk encouraged by cooling inflation amid fears that Britain faces recession
ONE of the Bank of England’s most hawkish policymakers has signalled he will stop calling for higher interest rates if inflation continues to cool.
Jonathan Haskel, who had been pushing for more rate rises, said he was encouraged by last month’s “broad based” fall in inflation because more reliable indicators of price changes are also starting to ease.
It came as official figures showed Britain is on the brink of recession, cementing bets that the Bank will start cutting interest rates in May.
The economy shrank by 0.1pc between July and September, according to the Office for National Statistics (ONS), which had previously recorded zero growth for the period.
While the Imperial College Business School professor, who has voted four times to raise interest rates to 5.5pc from 5.25pc since August, insisted that he would not shift his stance “based on one-month data”, a darkening economic backdrop will pile more pressure on the Bank to cut rates to kickstart growth.
Ellie Henderson, an economist at banking and wealth management group Investec, said a winter recession was now “far more likely” after the economy shrank by 0.3pc in October.
Another quarter of economic decline would mark the first technical recession since the first pandemic lockdown.
Inflation, as measured by the consumer prices index (CPI), fell to 3.9pc in November from 4.6pc in October, sparking a stock market rally and predictions that mortgage rates will fall further in the new year.
Prof Haskel said another closely watched measure of services inflation, which strips out volatile factors like air fares, had also seen a notable decline.
He wrote on social media site X, formerly known as Twitter, that this was “news” because the declines were more “broadly based” than in previous months.
Yesterday’s updated ONS figures also revealed that the economy performed worse than expected between April and June.
Instead of growing by 0.2pc in the second quarter, as the ONS had previously estimated, the economy flatlined.
Barclays joined a growing chorus of economists who are bringing forward their expectations of rate cuts.
Jack Meaning, chief UK economist at Barclays, said: “Inflation is falling faster than anticipated. Lacklustre growth and more evidence that slack in the labour market is emerging lead us to bring forward the timing of the first 25 basis point cut from August to May 2024.”
Barclays believes rates will fall to 3.25pc by early 2025.
The growth figures reveal the impact of high interest rates on UK households and will serve as a blow to Prime Minister Rishi Sunak, who at the start of the year made expanding the economy one of his five key pledges.
They also mean the UK’s postpandemic recovery is now worse than any other G7 economy except Germany.
Jeremy Hunt, the Chancellor, insisted “the medium-term outlook for the UK economy is far more optimistic than these numbers suggest”.
In more encouraging signs, shop sales rose by more than expected in November as Black Friday discounts boosted spending on toys and make-up ahead of Christmas.
Retail sales volumes rose by 1.3pc in November, according to the ONS, which far exceeded analysts’ expectations of 0.4pc.
Sales growth in October was also revised up to 0pc after the ONS previously said sales fell by 0.3pc.
Darren Morgan, director of economic statistics at the ONS, said: “Retail sales grew strongly in November as heavy Black Friday discounting encouraged shoppers to spend.” But he warned: “It’s still a challenging time for retailers.”
On a quarterly basis, retail sales fell by 0.8pc in the three months to November. Sales were also still below pandemic levels.
Non-food sales volumes were down by 2.7pc compared to pre-lockdown.
Lisa Hooker, of PwC, said: “In spite of the headline improvement in sales last month, Christmas is still likely to come down to the wire for retailers.”
PwC has warned that consumers are planning to spend less than normal in the run-up to Christmas because of the rising cost of living.
This increases the likelihood that shops will need to use Boxing Day sales to clear out seasonal stock, Ms Hooker said.
Referring to the traditional festive selling season, she added: “The golden quarter will have been a disappointment to many retailers.”
Switching the gold reserves into Bitcoin, perhaps. Or helping Nigel Farage open a bank account. Maybe attending a pro-Brexit rally. There are probably still a few things that could land staff in trouble at the Bank of England. But being completely wrong about the economy, repeatedly, is seemingly not on the list.
Over the course of the past week, it has become painfully clear that at least three members of the Monetary Policy Committee have little clue what is going on in the country where their decisions have a huge impact. Yet no one has offered their resignation, or been properly held to account. The British public deserves better.
In recent days, we have learnt two important things about the British economy. On Wednesday, the latest data showed that the rate of inflation was falling much more quickly than the City expected. The growth in prices came down to 3.9pc last month, from 4.6pc in October. And yesterday, revised figures from the Office for National Statistics showed that the economy contracted by 0.1pc in the latest quarter. That was probably not a huge surprise, given that consumers have been hammered by stealth tax rises through the freezing of thresholds, while real wages have stagnated, and many of our major trading partners across Europe are experiencing similar slowdowns. Even so, it takes the UK perilously close to the full-blown recession it has thus far managed to avoid.
And yet, last week three of the nine members of the Monetary Policy Committee actually voted for interest rates to go up. Had the other six agreed, the Bank Rate would now be 5.5pc. It could trigger another round of rises in repayments for anyone with a mortgage, knocking the housing market and prompting another rise in interest costs for business. The number of corporate insolvencies last month reached the highest level since 2009: zombie firms should not be kept on life support, but nor should promising businesses be pushed to the wall. And this increase in interest rates, which the Bank itself makes clear will have maximum effect between 18 months and two years from now, would have occurred at a time when inflation was nearing the target rate of 2pc.
It is not as if this was a one-off error of judgment. Only last month, MPC members, including the recently appointed Megan Greene, were warning that inflation would be higher for longer, at precisely the moment it was coming down.
And, of course, even though those MPC members were outnumbered last week, the remaining six all voted to keep rates on hold. None of them saw that what the UK needed this month was actually a cut in rates.
Interest rates are not an exact science and can be difficult to get right. There are many other factors that could drive up inflation, which are out of the Bank’s hands. No one ever said forecasting was easy, nor that we can always ensure, with total certainty, the right rate of interest for the economy. There is a large element of judgment involved in the MPC’s decisions, which is why its decisions are rarely unanimous. But that is the job. Which is why the Treasury needs to appoint people who are most likely to get it right, hold them to account, and cut short their terms if they keep making the same mistakes over and over again.
Many voices were, earlier this month, arguing for rates to be reduced. For example, the Shadow MPC, run by the Institute of
Economic Affairs, which keeps a close eye on the money supply (an indicator the experts at the Bank appear to disregard as an irrelevance) has been warning for some time of the risk of “overcorrecting”.
This week, one of its members pointed out that “almost every leading indicator has been pointing firmly downwards for some time, notably the monetary aggregates”.
The Shadow MPC wasn’t alone: many City economists have been fretting that, with the economy slowing sharply the Bank may have kept rates too high for too long, and that risks pushing the UK into a completely unnecessary downturn.
A fundamental problem is this. Across British officialdom, it seems
‘If decisions have no consequences, then there is no incentive to ever get them right’
that so long as you are part of the Remain, centrist establishment, and dismiss tax cuts, competitiveness and free trade on grounds they either won’t boost growth or cannot be pursued because our population is ageing or global supply chains are fragile, you get a free pass. You can print too much money, trigger a round of inflation, hold interest rates at near zero, realise the mistake too late, push rates too high and hold them there for too long, and can do so shielded from the consequences. No one in government will suggest that perhaps you should have looked at the data more closely, or talked to a few more small businesses and regional estate agents to get a feel for what was happening in the real economy, or consulted external economists, and then come to a more informed decision.
If decisions have no consequences, then there is no incentive to ever get them right. The British economy cannot endure a Bank that might be “independent” but isn’t accountable and lacks intellectual diversity. The MPC needs more balance. Members who get calls badly wrong should face scrutiny – or even the sack.