The Bank of England risks making the UK’s recession worse unless it cuts interest rates soon to ease the pressure on households amid the cost of living crisis, its former chief economist has warned.
Andy Haldane, who had been a leading advocate of raising interest rates before leaving the central bank in 2021, said there was a danger that the Bank could “crush the economy” by keeping borrowing costs at the highest level in 16 years.
Official figures released on Thursday showed Britain’s economy fell into recession at the end of last year as hard-pressed consumers cut back on spending in response to high interest rates and elevated living costs.
UK gross domestic product (GDP) fell by a larger than expected 0.3% in the three months to December after a decline in all main sectors of the economy and sharp decline in retail sales in the run-up to Christmas. It followed a drop of 0.1% in the third quarter. Economists regard two consecutive quarters of falling GDP as the definition of a recession.
Asked whether there was a danger the Bank could make the recession worse unless it cut interest rates soon, Haldane told Bloomberg’s UK Politics podcast: “That’s where the balance of risks lies, yes.
“For me the case for putting in place some upfront, early insurance on the monetary policy side is strong and strengthening, and I’m fearful we leave that insurance a little too late in the year.”
Financial markets expect the Bank to begin cutting rates this summer from the current level of 5.25%, with a first reduction in borrowing costs anticipated from as early as June. Investors are pricing in a 17% chance of a cut in May, with the probability of a June cut at almost 50%.
It comes after inflation held steady at 4% in January, defying expectations for a modest increase, after the first monthly fall in food prices for two years offset rising energy costs. Inflation had peaked at 11.1% in October 2022, a 41-year high.
The Bank’s policymakers have warned, however, that the UK faces ongoing inflationary risks from a tight jobs market and rising prices in the services sector of the economy. Andrew Bailey, the Bank’s governor, and three other members of its rate-setting monetary policy committee are expected to give evidence to the Commons Treasury committee on Tuesday.
Threadneedle Street had faced criticism for holding back on the start of its interest rate raising cycle until December 2021, when borrowing costs were set at a record low of 0.1%. Haldane was among critics at that time who warned higher rates were required to tackle soaring inflation.
However, the Bank’s former chief economist, who is now the chief executive of the Royal Society of Arts thinktank, has suggested he would have backed interest rate cuts from the end of last year as inflationary pressures fade and economic activity comes under pressure from higher borrowing costs.
“It’s one thing to have missed inflation on the way up, which happened, it’s quite another to then have crushed the economy on the way down,” Haldane said. “That double blow to credibility is one if I were a central banker, in my old job, I would be looking to avoid.”
