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Should the Bank of England cut interest rates with Britain’s economy in bloom?
The Times runs a “shadow monetary policy” commitee, made up of nine senior economists (including some former members of the actual MPC).
It has ‘voted’ to leave interest rates on hold today, but two of its nine members think the Bank should cut today (and one pushed for a rise).
First, the Monetary Policy Committee (MPC) does not mind surprising markets. We saw this back in November 2021, when the market was expecting the Bank to hike when ultimately it chose to keep rates unchanged. It subsequently raised rates at its December meeting. The point is, the Bank doesn’t feel the need to precision-steer markets to the timing of rate changes.
Second, the BoE was raising rates much earlier than either the Federal Reserve or European Central Bank in the latest hiking cycle. That means that, other things equal, they can cut earlier too.
Third, some of the last interest rate rises put through by the Bank were on the back of the mini-budget fallout in the autumn of 2022. Now that some distance has been put between that episode and today, those insurance hikes could be taken out while still keeping rates in restrictive territory.
Fourth, inflation in April could well be at or just below the Bank’s 2% inflation target due to strong energy-related base effects. It could look odd for the Bank to remain on hold against a backdrop of inflation back at target, and risks the MPC being tagged as too late on the way down as well as on the way up.
Finally, May is a forecast month. Though MPC members, including the Governor, have been at pains to stress that ‘all meetings are live’, a forecast publication month does allow more space for the Bank to communicate its views and outlook. Market rates are now expected to be high for longer on the back of a resilient US economy, putting inflation and activity lower over the MPC’s forecast horizon and offering yet another signal that cuts are on their way.
