No10 chaos has hamstrung the Bank of England

The Government’s indecisive approach to Covid has left monetary policymakers in disarray

Downing Street is not the only institution that seems without a clue what it is doing; the Bank of England, which is virtually at war with itself over the outlook for the economy and how best to address it, is similarly mired in confusion.

From the outset of the pandemic, the official line at the Bank of England has been that the threat to growth is much worse than the threat to inflation, allowing policymakers to accommodate the Government’s burgeoning Covid-related spending accordingly with zero interest rates and massive purchases of public debt. For a while, this seemed fair enough. But with the inflation target now set to be breached by a substantial margin, it’s beginning to wear a little thin.

The first to break ranks was the Bank’s chief economist, Andy Haldane, who has been warning of inflationary risk for nearly six months. Conveniently, he’s now gone, after accepting a job as head of the Royal Society for Arts, Manufactures and Commerce. Yet other dissenting voices have not been slow to fill his shoes.

In the past two weeks, a further two members of the Bank’s Monetary Policy Committee have shifted towards the Haldane view, albeit a less virulent form of it – first the deputy governor, Sir Dave Ramsden, who admitted that consumer price inflation could hit 4 per cent by the end of the year, and that policy might therefore need to be tightened earlier than anticipated, and then Michael Saunders, who similarly warned that extraordinary levels of monetary stimulus might have to be reined in.

At the root of this split is not so much the Bank’s own warring factions, or the mixed messaging of its economic modelling, as the Government itself. It’s all over the place, not just on the pingdemic, the traffic light travel regime, vaccine passports and Covid strategy in general, but on how to meet the challenge of rising social care costs, increased NHS pay, migrant boats, an ever more assertive China and virtually everything else besides.

About the only mission ministers seem clear about is that of rewriting the Northern Ireland Protocol, to which they all signed up little more than a year ago. When all around you is falling apart, the EU bogeyman makes a useful diversion.

Whatever one thinks of the disloyalty of Dominic Cummings, the Prime Minister’s mercurial one-time chief adviser, his diagnosis was instantly recognisable; that the PM “doesn’t have a plan, he doesn’t know how to be prime minister and we [Vote Leave campaigners] only got him in there because we had to solve a certain problem, not because he was the right person to be running the country”.

Loss of nerve over increases in National Insurance is only the latest example of the muddled, ill-thoughtthrough policy that now seems to define the Johnson Government.

That this is the wrong approach to paying for better social care was obvious from the start, but when it emerged that the Treasury was also hoping the increase would cover the NHS wage settlement, it lost its underlying justification as a form of social insurance as well, becoming just another tax rise instead.

That same sense of drift, indecisiveness and incompetence is now beginning to infect the economy, with potentially grave consequences. And it has left the Bank of England in a quandary over what to do.

Remember “stagflation”, that toxic mix of low growth and high inflation that brought the country to its knees in the 1970s? That’s where we may be heading if the Government does not get a grip. OK, so it seems somewhat unlikely that things will get as bad as they did back then, even if it shouldn’t be altogether discounted. The conditions that led to the extreme stagflation of the 1970s are simply not there this time around.

But persistently high inflation in combination with very low levels of growth is eminently possible, even likely, the way things are going. The almost farcical pingdemic, a crisis in labour supply entirely of the Government’s own making, is a classic case in point.

Pubs, restaurants and events are denied the “Freedom Day” they were promised if the staff needed to reopen are stuck at home on the off-chance they may have become infected. In little more than three weeks’ time, the double-vaccinated are in any case going to be released from the requirement to self-isolate. If then, why not now, with more than 70 per cent of adults fully jabbed?

The effect is to create further shortages in supply, driving up wages and prices accordingly at little or no obvious benefit to growth and productivity.

Small wonder the Bank of England seems as clueless as the Government. If it puts up interest rates to counter rising inflationary pressures, it risks both plunging our debt-addicted economy into recession and the Government into fiscal crisis.

With vaccine success, the road back to economic normality should by now have been clear. Sadly, it is not.