Published On: Thu, May 9th, 2024
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BoE gets interest rates wrong again and we’ll all pay price as deflation threat grows | Personal Finance | Finance

It doesn’t matter that inflation is on the run, the economy is in the doldrums, mortgage rates are rising again and homeowners are feeling the squeeze.

The BoE’s monetary policy committee (MPC) didn’t think these huge problems were enough sufficient to merit a rate cut.

Not even a tiny, symbolic reduction of 0.25 percent. Nothing.

I suppose we should be grateful that the MPC didn’t vote to increase interest rates again, as two of its nine members were doing just a couple of months ago.

That was madness at the time, and looks even more out of touch today. Have they learned anything, though? It doesn’t look like it.

To be fair, two members did vote to reduce bank rate by 0.25 percentage points to 5 percent. That’s one more than last month.

The remaining seven all voted for no change.

That’s despite consumer price inflation (CPI) falling to 3.2 percent in March, a fraction of its 11.1 percent peak, which it hit back in October 2022.

When April’s figure is published on May 21, markets expect CPI to have fallen to just 1.9 percent.

That’s below the BoE’s two percent target. Which would surely give the MPC no excuse to resist cutting.

It’s decided to play safe today, though, even though it means doubling down on its original mistake. Having held interest rates too low when inflation took off, the MPC is now keeping them too high as inflation plunges back to target.

Governor Andrew Bailey has admitted the BoE’s own forecasts cannot be relied upon, and called in former US Federal Reserve chair Ben Bernanke to work out why.

Bailey refused to apologise, though, preferring to blame others.

The MPC remains a slave to group think. So-called monetarist economists are collectively shunned, despite their urgent warnings that the money supply is shrinking, a sure sign of impending recession.

Sadly, the BoE only talks to itself.

We will all bear the cost in the shape of higher mortgage rates and slower economic growth, as consumer and business borrowing costs stay high.

It could even drive us into an unnecessary recession. Or worse, deflation.

In that case, the BoE could end up undershooting its target, inflicting yet more needless damage on millions of ordinary Britons.

That would finally destroy what’s left of its credibility.

The MPC is right to conclude that inflation isn’t conclusively defeated yet. Services CPI was still six percent in March.

But it doesn’t need to slash interest rates all the way back to one percent or two percent.

A modest 0.50 percent cut would only reduce bank rate to 4.75 percent. That’s still high compared to a couple of years ago.

I know the BoE is wary of cutting rates before the US does. That could weaken the pound against the dollar, and drive up the cost of US imports, reigniting inflation.

Yet the US is booming, and we are not. They don’t need a rate cut, we do. Sadly, we’ll have to wait for another month at least.

The only good news is that markets reckon there’s a 93 percent chance of an interest rate cut at the next MPC meeting on Thursday June 20.

The BoE had better deliver. It needs to do something right. Even if it is too little, too late.

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