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20 June 2024updated 21 Jun 2024 1:44pm

Why the Bank of England didn’t rescue Rishi Sunak

Andrew Bailey's announcement on interest rates was inescapably political.

By Will Dunn

Andrew Bailey, governor of the Bank of England and slayer of prime ministers, has just announced that the Bank will not be cutting interest rates just yet (the Bank rate is being held at 5.25 per cent) despite yesterday’s announcement by the Office for National Statistics that inflation has returned to its target level of 2 per cent. In doing so, Bailey has deprived Rishi Sunak of his last chance to take credit for some decent economic news before the election on 4 July.

Not that a rate cut would have changed the outcome of the election. Most people either understand that reducing inflation is the Bank’s job, not the Prime Minister’s, or don’t understand that but also don’t feel any better off as a result of inflation having fallen. There was never going to be space for mortgages to get radically cheaper overnight; when the Bank does reduce its main interest rate, as may happen in August, it will be by a small fraction of a percentage point. But a rate cut before the election would have given Sunak and Jeremy Hunt another opportunity to present themselves as having turned things around. On the right of the Conservative Party, this decision may well be remembered when (or, just about still, if) the Tory defeat is being chewed over in the bar of the Carlton Club.

This will fuel a long-burning resentment of the Bank’s independence on the Tory right. In 2017 the Conservative MP Andrew Tyrie, who chaired the Treasury Select Committee for seven years, suggested the Bank’s independent control of interest rates (which had been granted by Gordon Brown in 1997) contributed to the economic problems Britain suffered after the 2008 crash. In 2022, as Liz Truss sought the leadership, she ventured to blame the Bank for inflation and began talking about relieving it of its independence.

Trussites still blame Bailey’s limited response to the turmoil after the 2022 mini-Budget for her downfall. Bailey himself told Bloomberg: “Of course we didn’t depose Liz Truss,” which is up there with “of course I didn’t run over your dog” on the reassurance/incrimination scale.

Truss’s supporters, Suella Braverman and Jacob Rees-Mogg, were among the 44 Tory MPs (including Gavin Williamson and Iain Duncan Smith) who wrote to Jeremy Hunt in May this year, demanding a review of the Bank of England’s independence. The Tory right and the Reform Party also rather like the idea that the government could save billions by refusing to pay any more interest to commercial banks for their quantitative easing (QE) reserves, an idea that sounds fun until you realise that it bankrupted the Swedish central bank and would leave us without a vital lifeline in the next financial crisis.

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Today’s decision shows the difficult position the Bank of England, and all central banks, are in at a time of high government debt and exogenic inflation (price rises caused by things outside our borders, such as the international gas market). The Bank has set its policy in line with what it expects the path of inflation to be in the future, and services inflation (price rises on things such as healthcare and transport) remains high at 5.7 per cent. However, this also means the Bank is not going to offer any support to Sunak and Hunt’s attempts to present themselves as competent stewards of the economy. It is a technical decision. But it is also inescapably political. 

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