With the US Federal Reserve due to meet later today to raise rates by either 50 or 75 basis points (bps), attention will quickly turn to the Bank of England tomorrow when the UK central bank is expected to hike rates by 25bps.
This is unlikely to be sufficient, and if anyone on the MPC seriously thinks it will be, when other central banks are hiking more aggressively, then they’re kidding themselves. A 25bps hike tomorrow is likely to fall well short of what is required, and while it is true that some of the factors driving prices higher are out of the central bank's control, it's simply unacceptable for the Bank of England governor to wring his hands and claim there’s nothing they can do about it.
There’s plenty they can do, and a start would be to take their current mandate seriously. These officials are paid a great deal of money to make hard decisions, and they need to start earning it. With this morning’s headlines all about the effect that rising inflation has had on UK earnings, it's important to acknowledge that the Bank of England did get out in front early by starting to raise rates back in December, after the shambles that was November. But it’s now clear that they are well behind the curve and they need to address that.
Even allowing for the Bank’s early start, the overall effect of the rate hikes we’ve seen since then has been zero. That’s because since December the pound has dropped 10% against the US dollar, and is down 15% over the past 12 months, completely negating any effect higher rates might have had in controlling import inflation. The effect of the decline in the pound has been to push Brent crude prices in sterling terms to over £100 a barrel, and given that commodities are priced in US dollars, has magnified the inflationary shock to the UK economy on other food price measures as well.
It is quickly becoming apparent that more radical action is needed for the Bank to establish some sense of stability, because tinkering around the edges simply isn’t cutting it, and the central bank is quickly becoming a parody of itself. Over the past few months, we’ve had the central bank spending money on a new logo, and over the weekend there was a story that the bank spent £200,000 on a marketing rebrand, and a mission statement. As optics go, it's utterly tone-deaf and begs the question, what on earth is going on?
The Bank should be laser-focused on helping to address the monetary policy challenges here and now and looking to meet its mandate of 2% inflation. One of the reasons why some central bank officials have been hesitant to hike too aggressively has been concerns that doing so might tip the economy into a sharp recession; however we are well beyond that now. The UK economy is already heading for recession, with or without rate hikes, largely due to the central bank being comatose at the wheel, more concerned about its image than carrying out its core function of monetary policy.
Tomorrow the Bank faces two unpalatable options: to hike by 25bps and watch the pound slide below 1.2000 towards 1.1000, exacerbating the inflationary impulse further, or start to get out in front and hike more aggressively. We need to see 50bps at the very least, and for the bank to signal they will be much more proactive when it comes to meeting its inflation target.
The Bank has already lost the battle in avoiding a recession; the direction of travel is clear. We’re heading for a slowdown, which means it faces the choice of hiking hard now, in line with the Federal Reserve, and hope that it is able to cut later once inflation has come under control. It’s either that, or continue to fiddle around the edges and watch inflation become entrenched for longer, and for the economy to remain mired in stagflation.
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