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5 May 2022

The Bank of England is helping drive the UK into recession

Rather than raising rates in the middle of a living-standards crisis, the bank should be cutting them.

By David Blanchflower

Here they go again. The Bank of England’s hopeless Monetary Policy Committee has made another major error by raising interest rates from 0.75 per cent to 1 per cent (their highest level since 2009) as the UK is quite clearly already in recession. The rate rise we saw today is exactly the opposite of what is needed. If I was still a member of the MPC, I would be voting for rate cuts. Let me explain why.

In April 2008 the UK entered recession but, even after the collapse of Lehman Brothers in September, the other members of the MPC failed to spot it. It is hard to spot economic turning points. There was some excuse in 2008, when the UK had enjoyed 63 consecutive quarters of positive economic growth from 1992 through to 2008, but not this time around. MPC members had some excuse last time as they, mistakenly, thought the good times would keep on rolling – but of course they didn’t. 

This time around policymakers have the memory of their failure to spot the biggest crash since the 1929 Great Depression to look back on and learn from. The Bank of England has learned diddly-squat. Its communications under governor Andrew Bailey have been an embarrassing disaster.

As late as September 2008 there was still talk of the MPC raising rates because of the spike in inflation, despite the UK having entered recession six months earlier. As the chart below illustrates, inflation peaked at 5.2 per cent in September 2008 and then started to plummet like a rock. A year later it was 1.1 per cent, well below the MPC’s 2 per cent target. Then output fell by 0.5 per cent in Q3 2008, by 1.5 per cent in Q4 2008 and by a further 2.9 per cent over the next three quarters. Expect something similar again. The economy grew a measly 0.1 per cent in February 2022; I fully expect a number of negatives in the months to come, plus a rise in unemployment fuelled by the cruel MPC. They still don’t understand that a rise in unemployment is much worse for ordinary people’s well-being than a rise in inflation.  

Inflation in the UK, according to the most recent data is 7 per cent: it was 0.7 per cent a year ago. There is every reason to believe it is set to plummet again, just as it did in 2008. There is no basis whatsoever to believe that inflation is embedded and every reason to believe that it is temporary, as it was during the 2008 recession. 

Then, as now, rising oil and commodity prices were the driver of higher inflation. The jump is temporary and will fade as people cut their spending and start to shun expensive goods. How a rate rise solves the problem of pandemic-induced supply shocks beats me. The Chancellor, Rishi Sunak, has added to the pain by raising taxes and cutting benefits just at the time when he should be doing the opposite.

Consumer and business confidence have collapsed as have retail sales, which will drive the economy down. Consumers are heading for economic Armageddon as they face the biggest forecast squeeze in household income since records began in 1956-57. The MPC is representing the interests of the Square Mile and its banker friends, who like higher rates, not those of the woman waiting for a bus on the Mile End Road, which starts a mile from Aldgate.   

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In an interview in January, 2008 I said: “Worrying about inflation at this time seems like fiddling while Rome burns.” Same old, same old. The UK economy is about to tank due to the reckless decisions of the MPC. The only issue is when, not if, its members will have to go into reverse gear.

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