Sick Britain no longer needs Dr Bailey’s medicine
LONDON, Feb 1 (Reuters Breakingviews) - If markets are right, the Bank of England will deliver its tenth consecutive interest rate rise on Thursday. That would mean the central bank has increased the cost of money fortyfold since December 2021 to fight rising prices. However, such monetary tightening increasingly looks at odds with Britain’s dire economic conditions.
Bank of England hawks can point to key indicators that are still running hot, such as inflation, economic output and wages. That’s why economists expect them to ram through yet another 50-basis point hike this week, bringing the base rate to 4%. Yet those gauges are backward-looking and will cool down this year as a recession and past rate hikes hit consumers and firms.
Take the economy. The UK has been particularly hammered by the high cost of energy imports and rising hikes, which have battered its outsized consumer and housing sectors. The government’s austere fiscal policy, exacerbated by the fallout from Liz Truss’ catastrophic premiership, has further hurt growth.
True, output eked out an unexpected 0.1% month-on-month rise in November, rather than the 0.2% decline predicted by a Reuters poll of economists, thanks to World Cup-induced drinking and video-game sales. But forward-looking surveys tell a different story. Private sector economic activity dropped at its fastest rate in two years in January to a level consistent with falling output, according to the latest Purchasing Managers’ Index. The UK will be the only advanced economy to contract in 2023, the International Monetary Fund reckons.
As for consumer prices, headline inflation edged down to an annual growth rate of 10.5% in December from 10.7% in November. Core inflation, which excludes food, alcohol and tobacco and energy, was unchanged at 6.3%. Both are uncomfortably high. Yet, in its latest forecast in November, the Bank predicted consumer price growth would fall to 1.4% in late 2024, far below its 2% target. Goldman Sachs agrees, projecting inflation at just 1.75% next year.
The effects of rate hikes take time to show up in the numbers. The risk for Governor Andrew Bailey is that further tightening would cause a disinflationary spiral that deepens the recession, forcing him into emergency rate cuts. In this case, it is better to withdraw the medicine before the patient overdoses.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to add “Governor Andrew” before “Bailey” in paragraph six.)
CONTEXT NEWS
The Bank of England will raise its key interest rate by half a percentage point to 4% on Feb. 2, according to economists polled by Reuters.
The rate-setting Monetary Policy Committee of the BoE split three ways in December when the central bank sanctioned a 50-basis-point increase. Two members of the nine-strong committee voted to end rate rises while one backed a 75-basis-point move.
The BoE was the first major central bank to begin tightening monetary policy after the Covid-19 pandemic, lifting rates from a record-low of 0.1% in December 2021.
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