The Bank of England’s Monetary Policy Committee has failed.
It failed in its role of keeping inflation at 2% by letting it get out of control. It responded far too late and so it was ordinary people who paid the price as they saw their cost of living shoot up and struggled to make ends meet.
While the MPC eventually did the right thing by increasing rates, it has now for several months turned a blind eye the economic warning signs that monetary policy is too restrictive and so it kept interest rates high in a futile attempt to claw back credibility.
The MPC’s restrictive monetary policy is causing real damage to the economy as firms and households struggle to cope with increased borrowing costs. The Bank’s decision to keep interest rates at 5.25% and not begin to lower them will lead to even more harm – likely plunging the UK into a recession – causing misery for millions. The MPC has not honoured its mandate and so has failed the British people.
The MPC will likely defend its actions by pointing to the slight uptick in inflation in December and argue that increased instability in the Red Sea and the Middle East means it is right to stick to its guns and not lower interest rates. But it would be wrong.
While the increase in inflation in December was obviously disappointing, it has to be remembered that it was only very small. Moreover, the key driver was the increased price of cigarettes due to tobacco duty rises and so should not factor into decisions over monetary policy.
The tensions in the Red Sea are a major concern given the impact they have on shipping costs which are then passed onto consumers in the form of higher prices. But as this would essentially be a supply side shock it would be inappropriate for the Bank to respond through monetary policy tools and so again the MPC should not allow it to colour decision-making over interest rates.
People losing their jobs and struggling to find a new one is not only a disaster for them and their families, it is also one of the most obvious warning signs that the economy is in trouble.
What is more, there is every reason to be optimistic about inflation in the UK. Inflation is considerably lower than the Bank had forecast. Money supply growth has stalled, borrowing has decreased dramatically, and the labour market has been loosening for months. So it is little wonder many major banks and investment firms are forecasting inflation to return to target in April. This is welcome news and it has happened at a much faster pace than forecast by the Bank of England. However, we must ask at what cost and whether that is a price worth paying.
Borrowing has decreased but that’s not because households and firms have had a sudden case of financial prudence or are feeling much more wealthy. It is because they cannot afford to borrow. This means that they have less money to spend and invest which we have already seen reflected in sales and manufacturing figures.
A cooling labour market may help assuage the MPC’s fears of a wage-price spiral, but people losing their jobs and struggling to find a new one is not only a disaster for them and their families, it is also one of the most obvious warning signs that the economy is in trouble.
These warning signs have been visible for some time as the Bank’s actions began to bite. We know that the impact of monetary policy often lags and so we should expect things to get even worse. To avoid a recession the MPC should vote to lower Bank Rate to 5% on Thursday.
The MPC has repeatedly failed the British people over the past few years. It risks failing them again by plunging the economy into an avoidable recession. It will be a novel experience for the current MPC but this week it has the opportunity to finally do the right thing by voting to lower interest rates.
Ben Ramanauskas is a research fellow at Oxford University and a former government adviser
