Bailey has a choice between brutal recession or runaway inflation

Central bankers face an unenviable dilemma – and they’ll get little help from this Government

‘If the Bank is busy fighting inflation and can’t engage in monetary easing, the Treasury should try to revive the economy with fiscal easing’

It’s pretty staggering when you pause to think about it. Figures out yesterday showed that the UK economy has contracted for the second month in a row, reigniting fears that the country is on the brink of a recession.

Meanwhile, there is almighty sell-off on global markets. US stock markets last week suffered their worst week since January as data showed that consumer price rises were outstripping economists’ forecasts and hit 8.6pc in May, putting paid to hopes inflation might have peaked in April.

Yesterday, the benchmark S&P 500 fell 3pc in early trading, dipping into bear market territory – 20pc below its record high in January – while the tech-heavy Nasdaq slumped as much as 4pc. The UK’S FTSE 100 wasn’t spared the pain, closing down over 2pc.

The price of Bitcoin has fallen by roughly a fifth since Friday to below $24,000 (£19,700). Binance, the world’s biggest cryptocurrency exchange, “pausing” withdrawals because of “extreme market conditions”.

Usually I wouldn’t bother to mention what I consider a joke asset without intrinsic value, but it’s become a pretty good barometer of how bullish investors are feeling. Right now they are behaving like a sleuth of bears with sore wallets.

Yet, against this backdrop of gloom, the Bank of England and the US Federal Reserve are both more or less nailed on to raise rates later this week.

Andrew Bailey and Jerome Powell will therefore be figuring out how to deliver the message: “Things are bad and likely to get worse, but buckle up because we’re going to raise rates anyway.” It’s extraordinary really.

There were mitigating circumstances in the UK economy figures. Almost all of the contraction was down to the fact that the NHS is winding down its test and trace programme as the Covid pandemic continues to wane.

However, the fact remains that this was the first time all main sectors of the economy – services, manufacturing and production – have shrunk since January 2021. Companies of all sorts are struggling to cope with rising costs and supply chain issues. Investors certainly weren’t buying the mitigation, with the pound falling by as much as 1.4pc to $1.21 – its lowest level since May 2020.

Economic growth is very weak at best and we’re staring down the barrel of an inflation-induced slump. Economists are now expecting UK growth to contract by between 0.5pc and 0.7pc in the second quarter.

But, at the same time, central bankers also need to try to curb rampant price rises. Having spent so long last year arguing that inflation was only transitory, policymakers clearly missed their chance to surf the post-pandemic bounceback and make the precautionary increases that may have helped keep a lid on price rises.

This means we are now slap-bang in the worst of all worlds. Bailey and the other Bank rate setters are facing a choice between the lesser of two evils: a brutal recession or runaway inflation. And, if they misstep, we could well end up getting both.

Given the importance of clear messaging it is therefore far from ideal that the Bank that has made a succession of PR gaffs. The Telegraph recently revealed Threadneedle Street had shelled out more than £200,000 on private consultants to create a mission statement and “define the essence of the organisation”.

The new statement will spell out “why people are proud and motivated” to work for the Bank as it faces heavy criticism for its handling of surging inflation and struggles to attract staff amid a war for talent in the City. This revelation comes after the Bank faced criticism for spending £50,000 of public money on a “more inclusive” logo and Bailey’s clod-footed entreaty for workers not to ask for pay rises.

Nor can the Old Lady of Threadneedle Street expect No10 to put a shoulder to the wheel. Ideally, fiscal policy would combine with monetary measures in order to pull the economy out of this slump, especially given that the Bank is essentially having to fight on two fronts simultaneously.

But if anything, politics is making matters worse. The Treasury has helped households deal with higher energy bills but companies have been left to fend for themselves. Risking a trade war with the European Union by threatening to tear up the Northern Ireland protocol can best be filed under “unhelpful”.

Shortly after facing a vote of no confidence from his own MPS last week, Boris Johnson promised to unlock growth by allowing people to use their housing benefits to buy their homes. That is a policy that was trialled, piloted and didn’t work in 2015. It rather suggests ministers are not struggling under a surfeit of ideas.

Well, here are a few. If the Bank is busy fighting inflation and can’t engage in monetary easing, the Treasury should try to revive the economy with fiscal easing.

There is no point, for example, launching a review into petrol pricing. This is pure displacement activity. The biggest chunk of the cost of diesel and petrol at the pump goes directly to the Treasury. The Government therefore needs to cut the tax component on both fuel and energy bills for households and businesses.

It also needs to admit next spring is not the time to raise corporation taxes. And, while we’re at it, perhaps Rishi Sunak, who has recently got the hang of executing about-turns, could reverse his disastrous increase in National Insurance contributions. It would be a start at least.