What Should the Bank of England Do?

Time to be bold

Tomorrow the Bank of England’s Monetary Policy Committee (MPC) will announce its interest rate decision. Given that most economists, analysts, and commentators are downgrading their growth forecasts for growth in the UK – coupled with some rather dovish comments from some members of the MPC – it seems likely that it will lower Bank Rate from 4.75 per cent to 4.5 per cent.

In many ways this is to be welcome. Unfortunately, it is another example of the MPC being overly cautious, being too slow to act, and doing too little too late. I’ve been very critical of the MPC on here and in various publications over the past few years. It was far too complacent in the aftermath of the Covid lockdowns and ignored the warning signs of rapid growth in the money supply, choosing instead to believe that the key driver of inflation was on the supply side (all while being well meaning and not wanting to harm the recovery) and so allowed inflation to get far too high.

The MPC then over compensated by tightening monetary policy too aggressively and then keeping interest rates too high for too long. As inflation returned to target it did begin to lower Bank Rate but in a very cautious way as it continued to focus on wage inflation and supply side factors rather than the money supply all while ignoring the impact on the real economy.

Despite being critical of the MPC I do have a lot of sympathy for it. The MPC has a mandate and so if inflation is not at two per cent then it is deemed to have failed and so it feels pressured to use its very blunt tools to return inflation to that very specific target as soon as possible. Some of the recent forecasts have shown inflation remaining around the 2.5 per cent mark for most of 2025 but it's possible that this will be revised down and we’ll see inflation being projected to hit or even overshoot the target this year.

Regardless, the MPC needs to be bold and be prepared to allow inflation to remain slightly above target going forward. As mentioned above, most economists and financial institutions have revised down their growth forecasts for the UK from an already paltry two per cent to a truly pathetic one per cent for 2025.

Such low growth is unacceptable. It will mean that real wages and living standards will remain stagnant. It’s even more worrying given that the unemployment rate has been slowly ticking up while consumer and business confidence is evaporating. While the risk of a major recession is unlikely, it is looking increasingly possible that the UK will enter and remain in a period of zero growth and businesses will be forced to close and people will lose their jobs and livelihoods. It will be the young and the low-skilled who will suffer the most as a result of this as they see their life chances destroyed and face a future of unemployment or low-paid work.

The government obviously needs to accept responsibility for much of this (as does the former Conservative government). Its doom mongering during the Summer helped to destroy consumer and business confidence, its austerity Budget has hiked taxes on firms with the incidence falling on workers, and its ‘Workers Rights’ reforms are certainly not helping. While it is encouraging to see Rachel Reeves get serious about supply side reform as the key driver of growth recently, the government has caused a great deal of damage to the economy already.

However, this is not to let the Bank of Engangland off the hook. It has failed in its task over the past few years. What is more, although it looks likely to start moving in the right direction tomorrow, it is still being far too cautious.

Rather than cutting Bank Rate to 4.5 per cent, it should be bold and lower it to at least 4.25 per cent but ideally to four per cent. This would be potentially controversial and certainly out of keeping with the Bank’s reputation, but it would help to alleviate the pressure on many firms and households and help to protect people’s jobs and livelihoods. It would also send an important signal that the Bank is prepared to do whatever it takes to support the UK economy now and over what looks set to be a very volatile period.

Thanks as ever for reading. I’ll probably write something tomorrow or Friday where I defend the Bank of England’s independence but we’ll see.