In life, nothing is certain except death, taxes, and the unreliability of Andrew Bailey. Having been too slow to raise interest rates in the face of surging inflation, is the Bank of England now dawdling in cutting them, just as we are set to discover Britain slipped into a recession last year?
First, the good news. The Office for National Statistics this morning announced that inflation unexpectedly held steady last month at 4 per cent. City expectations had been for an increase to 4.2 per cent. Food prices dropped by 0.4 per cent, the first fall since December 2021.
Whilst Britain’s inflation rate may remain above that of our American and European cousins, this will have come as a welcome surprise for Jeremy Hunt as he finalised the Spring Budget. The Chancellor claimed that, although inflation “never falls in a perfect straight line”, the Government’s plan is working (whatever it is). Even if taming inflation is the Bank’s job, halving it is the only one of Rishi Sunak’s five pledges the Government has actually hit so far.
That inflation hasn’t spiked suggests doom-mongering about the crisis in the Red Sea was overblown. Mea culpa, mea maxima culpa. Supply chains are more resilient, or Britain’s economy is less exposed, than expected, even if our walk on part in America’s game of Whack-A-Mole looks increasingly futile.
But that’s where the good news for both the Government and the Bank of England. The ONS is expected to reveal tomorrow as to whether the UK slipped into a recession last year. The figures for the third quarter of last year showed a 0.1 per cent contraction. If the same is true for those of the fourth quarter, the UK will have matched the description of a technical recession, even if it is likely to only be temporary and far from deep.
Those of a monetarist description bent are thus advocating for a rate cut. Tim Congdon and Julian Brazier have both argued that, by failing to cut rates, Bailey is making recession and deflation a bigger looming concern than inflation. Cuts aren’t expected until May or June. Should they be brought forward?
The money supply grew more in 2020 than in the years since the financial crisis, and inflation went on to reach a 41-year high of 11.1 per cent. Eventually roused to action, the Bank hiked rates faster than at any point since the 1980s, from the absurd low of 0.1 per cent to 5.25 per cent. Broad money has shrunk at its second-fastest rate in history in response. Contraction and deflation are unhappy prospects for any Prime Minister in an election year.
Peter Franklin has outlined the disastrous consequences of deflation. The common expectation is that inflation will fall below the Bank’s target rate of 2 per cent by April. Downing Street will hope rates are falling sooner rather than later, even if that means before the target is met.
Yet the Bank is likely to remain cautious. The Monetary Policy Committee remains worried that our tight labour market and volatile energy prices will see inflation spike later this year. It has outlined an expectation not of a rapid fall in rates, but a drop back by only 1.25 per cent by the first quarter of 2025.
With the lights flashing across the geopolitical dashboard, this might be prudent. But throughout Bailey’s tenure at Threadneedle Street, prudence has been a word rarely paired with his name. It would be entirely in keeping for a Governor who was taken by surprise by inflation to be equally shocked when deflation rears its ugly head too.
The sooner he is sacked and replaced – with my ‘All Monetarist Shortlist’ used in the hunt for his successor – the better.