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What the Bank of England raising interest rates tells us about Brexit

Is Project Fear dead - or yet to begin?

The economists, academics and officials who make up the Bank of England's Monetary Policy Committee decided on Thursday 2 November 2017 to raise the Bank Base Rate, in what is the first time since the financial crisis the central bank has pulled interest rates up, rather than pushed them down.

The Bank of England acts independently from the government, but nevertheless politicians will be watching closely, as the Bank Base Rate directly or indirectly affects the cost of borrowing, from government spending to voters'monthly mortgage payments.

But what happens with interest rates is also a sign of the economy - think a sailor tacking in the wind - and we can expect any hike to be seized on by both Remainers and Leavers as proof their predictions were correct.

In fact, the current rate of 0.25 per cent is unusually low, even in the context of the last decade. 

In 2007, the Bank base rate was considerably higher – it was 5.75 per cent that July - while it was as high as 7.25 per cent in October 1998. 

Like other major central banks, the Bank of England slashed rates in response to the global financial crisis. Cutting the rate to 0.5 per cent in March 2009, it hoped to ease pressure on mortgage borrowers and give the government breathing space to deal with debt. 

The decision to cut the rate even further in August 2016 was made shortly after Brexit, when the central bank wanted to keep the economy stimulated.

So in this context, returning to 0.5 per cent is actually returning to the status quo since the financial crisis. 

For Leavers, this may be proof that Project Fear was overblown and the central bank feels shipshape enough to start rearranging the furniture. After all, the plan for years has been to raise interest rates - speculation dates back as far as 2013, and when current governor Mark Carney arrived, he actually introduced "forward guidance" which was widely interpreted to mean raising the base rate when unemployment fell to 7 per cent (that happened back in 2014, and the base rate stayed low). 

But Remainers will point out that the reason why the central bank raises interest rates in the first place - to control inflation.

The Bank of England has long subscribed to an economic theory called inflation targeting, where the central bank's job is to focus on keeping inflation at 2 per cent. One of the tools it has at its disposal to control inflation is the Base Rate. 

Since Brexit, the depreciation of sterling has made imports more expensive and driven up prices. In September, inflation was at 2.9 per cent. In its notes accompanying the rate hike, the MPC said that it expected inflation to rise to above 3 per cent in October. 

Crucially, the notes continue:

The decision to leave the European Union is having a noticeable impact on the economic outlook.  The overshoot of inflation throughout the forecast predominantly reflects the effects on import prices of the referendum-related fall in sterling.  Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly.  And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.

In other words, the forecast for Brexit is inflation, and slow growth. This is the Bank of England responding to the pressures of leaving the European Union, not a sign that the economy is strong enough to easily withstand interest rate hikes. 

The decision of the central bank to raise the Base Rate indicates it is more worried about consumers being able to afford the cost of basic goods than those paying their mortgage bills. Since inflation hits the poorest the hardest, this may suggest the stormiest waters stil lie ahead.

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

Photo: Getty
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Commons Confidential: Tories turn on “Lord Snooty”

Your weekly dose of gossip from around Westminster.

With the Good Friday Agreement’s 20th anniversary rapidly approaching, Jeremy Corbyn’s office is scrambling to devise a celebration that doesn’t include Tony Blair. Peace in Northern Ireland is a sparkling jewel in the former prime minister’s crown, perhaps the most precious legacy of the Blair era. But peace in Labour is more elusive. Comrade Corbyn’s plot to airbrush the previous party leader out of the picture is personal. Refusing to share a Brexit referendum platform with Blair and wishing to put him in the dock over Iraq were political. Northern Ireland is more intimate: Corbyn was pilloried for IRA talks and Blair threatened to withdraw the whip after the Islington North MP met Gerry Adams before the 1997 election. The Labour plan, by the way, is to keep the celebrations real – focusing on humble folk, not grandees such as Blair.

Beleaguered Tory Europeans call Brextremist backbencher Jacob Rees-Mogg – the hard-line European Research Group’s even harder line no-dealer – “Lord Snooty” behind his back. The Edwardian poshie, who orchestrates Theresa May’s taxpayer-funded Militant Tendency (members of the Brexit party within a party are able to claim “research” fees on expenses), is beginning to grate. My irritated snout moaned that the Beano was more fun and twice as informative as the Tories’ own Lord Snooty.

Labour’s Brexit fissures are getting bigger but Remainers are also far from united. I’m told that Andy Slaughter MP is yet to forgive Chuka Umunna for an “ill-timed” pro-EU amendment to last June’s Queen’s Speech, which led to Slaughter’s sacking from the front bench for voting to stay in the single market. The word is that a looming customs union showdown could trigger more Labexits unless Jezza embraces tariff-free trade.

Cold war warriors encouraging a dodgy Czech spy to smear Comrade Corbyn couldn’t be further from the truth about his foreign adventures. In Arsenal’s Emirates Stadium, Corbyn recalled spending a night in Burundi pumping up footballs. The club offered to donate shirts for an aid trip but he asked for the balls to be shared by entire African villages. He was War on Want, not Kim Philby.

Screaming patriot Andrew Rosindell, the chairman of an obscure flags and heraldry committee, is to host a lecture in parliament on the Union Jack. I once witnessed the Romford Tory MP dress Buster, his bull terrier, in a flag waistcoat to greet Maggie Thatcher. She walked past without noticing.

A Tory MP mused that Iain Duncan Smith was nearly nicknamed “Smithy”, not “IDS”, for his 2001 leadership campaign. Smithy would still have proved a lousy commander.

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 22 February 2018 issue of the New Statesman, Sunni vs Shia