ALEX BRUMMER: Bank of England should have held back on any more rate hikes… or even cut them
Central banks across the globe were off the pace when it came to recognising that the inflationary genie was out of the bottle in 2021.
They are repeating the mistake. All – including the ECB, the Federal Reserve in the US, the Swiss National Bank (SNB) and the Bank of England – recognise that the turmoil in the banking sector effectively means that credit conditions, the availability of loans and liquidity, have tightened.
The impact, then, is not dissimilar to that of an interest rate increase in constraining growth prospects. Indeed, tighter loan conditions will likely have a more immediate impact on inflation than monetary policy, which takes time to work.
Yet global group-think looks to have gripped decision-makers, with the Bank of England following the Fed, the ECB and SNB in lifting rates.
Schoolboy error: The Bank of England has raised the base rate by a quarter of a percentage point to 4.25%
The reaction to the failure of Silicon Valley Bank, the collapse of Credit Suisse, tightening of credit conditions and steep falls in equity values of banking shares (which weakens capital buffers) has been the reverse of responses to other global events.
At the start of Covid, there was a rush to cut interest rates, expand money printing and arrange global currency swaps to stabilise nervy markets.
During the UK’s liability-driven investments crisis, the Bank immediately launched a lifeboat to avoid a doom loop of insolvencies.
Faced with uncertainty this time, it has raised the bank rate by a quarter of a percentage point to 4.25 per cent.
You don’t have to be former monetary policy committee dissident Danny Blanchflower to recognise this is an error. It is economics 101 (a lesson of undergraduate teaching) that you don’t go full Herbert Hoover and tighten policy into turbulence.
The Fed chairman Jay Powell at least acknowledged that the ongoing banking crisis was a factor in the Fed’s decision to move its key federal funds rate by just a quarter point and hold back on forward guidance.
There is still much we don’t know about the health of US regional banks. Moreover, the noise around San Francisco’s First Republic bank may have quietened down, but the problems are unresolved.
At the ECB, Christine Lagarde was too gung-ho in her embrace of a half percentage point rise, admittedly from a lower starting point.
The eurozone has never resolved its underlying sovereign debt crisis or come to grips with the fact that some Italian and Greek banks are still being propped up by the central bank.
Here in Britain, the tone of the Bank of England minutes is fascinating. The nine-person monetary policy committee was in a difficult position because of the February surprise when consumer price inflation popped up.
Even though the 10.4 per cent annual jump may have been erratic, the Bank, having been on the back foot over the cost of living for so long, could not afford to ignore it.
Yet there was sufficient material in the minutes to provide a counter view.
For much of the last week, there have been declarations from Threadneedle Street that UK banks have robust capital (does that include the challenger lenders?) and the system is resilient.
This is a bit like the football club which praises the coach before dismissal.
But the reality on the money markets is that ‘wholesale money costs have risen’ as a result of the stresses, so there was a tightening before the latest quarter point rise.
A two-person minority on the MPC – outside members Silvana Tenreyro and Swati Dhingra – wanted a pause while the energy price shock unwound and the full effects of monetary tightening came through.
It was argued that policy had become increasingly restrictive and rate rises would need to be reversed.
The inflationary spiral across the globe has challenged the seeming infallibility of central bankers and made a nonsense of targeting. UK prices are still rising at five times the target set by HM Treasury.
Bank of England governor Andrew Bailey and his fellow central bankers plainly have felt there is no choice but to tighten monetary conditions if institutional credibility is to be restored.
The Old Lady was concerned enough about the banking events of the last month to ask for a special assessment of recent turmoil for its May meeting. The sensible thing would be to have paused or even cut rates now ahead of the study.
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