The Bank of England has maintained its stance on central bank independence, contrasting with the US Federal Reserve under pressure from the Trump administration. Its decision to hold the bank rate at 3.75% came less than 24 hours after the Fed raised American borrowing costs, showcasing a divergence in monetary policies.
This decision came despite worsening conditions in oil markets and the threat of rising inflation. Chief economist Huw Pill advocated for a rate increase, citing concerns over the impact of Middle East events on consumer prices. His proposal was rejected in a six-to-three vote, marking the second consecutive month he found himself on the losing side. Pill emphasized that the “magnitude and persistence of events in the Middle East have proved stronger than in July,” and warned of a potential second-round impact on consumer prices. With headline prices on the rise at 3.1% and above the Government’s 2% target, the case for acting now is overwhelming. Forecasts for food and energy prices are dire.
Inflation and Wage Pressures
Headline prices are on the rise at 3.1%, with forecasts for food and energy prices looking dire. While private sector wages are under control, the same cannot be said for the nation’s ever-bigger state sector. Trades union pressure is rampant, as symbolised by the extra £500 million of taxpayers’ money found for teachers. As the state sector starts to expand exponentially with the railways, steel and, potentially, water supplies tracking back into the public’s hands it will be hard for Labour, financed by the unions, to hold back the tide. Workers in the wealth-creating section of the economy have less bargaining power, but willingness to accept real wages on hold or a cut is limited.
The Bank’s Monetary Policy Committee (MPC) has a history of differing from its chief economist. Andy Haldane was a lonely voice for higher rates and less money-printing in the run-up to the inflation peak of 11.1% in October 2022. The record of the MPC defying the advice of the Bank’s chief economist is not good.
Quantitative Tightening and Gilt Yields
The Bank’s quantitative tightening policy has faced scrutiny. Under pressure from left and right to slow or halt its policy of offloading gilts, causing higher bond yields, the Bank changed tack. This move provides some modest help to the Office for Budget Responsibility and Chancellor John Healey by taking pressure off surging ten- and 30-year gilt yields.
Governor Andrew Bailey defended the policy, arguing it ensures capacity for future crises, but the Bank is the only G7 government to pursue such a policy. The Bank has decided to hold back for the moment, before resuming the tightening at a predictable rate of £20billion a year. Some £120billion of longer dated stuff, which matures in 2049, will remain on the balance sheet backing banknote issue.
Economic and Political Challenges
The UK government’s tax-and-spend approach shows no capacity to take a meat axe to index-linked welfare and pension spending. The Competition and Markets Authority’s investigation into the AkzoNobel-Axalta merger, valued at $25 billion, highlights the need to protect UK scientific innovation. AkzoNobel, inheriting ICI’s brilliant laboratories in Slough and Gateshead, has been a source of innovation in coatings and other technologies. Unless regulators and the Government win assurances that the UK’s scientific edge is preserved, the deal would be a fatal loss to British and Dutch makers.
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