The England cricket team are winning friends and admirers after adopting a style of play known as Bazball. Named after the side’s coach, Brendon (Baz) McCullum, it is an aggressive, carefree approach to the game in which risks are taken with bat and ball. It doesn’t always come off but, win or lose, it has made the England team a lot more fun to watch.
Rishi Sunak is a cricket fan and in his early days as Boris Johnson’s chancellor he was a strong advocate of an economic form of Bazball. This was early 2020 and, in truth, the Treasury and the Bank of England had no choice but to throw caution to the wind because a global pandemic was raging. Sunak borrowed more than any other peacetime chancellor so that furloughed workers still received wages. The Bank cut interest rates to a record low of 0.1% and pumped billions of pounds into the economy through its bond-buying programme known as quantitative easing.
To the extent that it prevented a health emergency turning into an economic meltdown, the just-go-for-it approach paid off. Now, though, there has been a return to a more safety-first approach and the Treasury and the Bank are playing with the straightest of bats. Taxes have been raised in an attempt to reduce borrowing. Interest rates are being increased to choke off inflation.
For now, at least, the days of experimentation are over. There were side-effects from the all-action approach, initially through soaring asset prices which later spread to a more generalised pickup in consumer prices. Liz Truss’s brief premiership gave economic Bazball a bad name and highlighted a key difference between running an economy and battling for the Ashes: the activities of the England cricket team are not subject to incessant scrutiny by the world’s financial markets.
Even so, there are downsides to a return to orthodoxy. One is that it doesn’t go down all that well with the punters, as Sunak is likely to find out in the three byelections being held this week. A second is that it is hard to put the genie back in the bottle. The desperate measures deemed necessary to keep the economy afloat – first during the global financial crisis and then during the pandemic – have encouraged heterodox thinking. Economic Bazball takes many forms, including modern monetary theory and the Green New Deal.
Nor is the return to economic orthodoxy without its own side-effects, as the UK is about to discover. After moving sideways for more than a year as borrowing costs have steadily increased, the economy is now heading for recession.
Policymakers, and central banks in particular, are being attacked for acting too slowly on the threat of inflation, which is now said to be in danger of becoming embedded. Interest rates will need to remain higher for longer in order to squeeze inflation out of the system and to restore the credibility of central banks.
In a sense, the criticism of central banks is justified. The setting of interest rates was handed to them because, as experts, they were supposed to be able to predict the future. The fact that they failed to do so makes it a fair cop.
Things looked a lot different though when almost all the remaining Covid-19 lockdown restrictions were removed two years ago this week. The annual inflation rate stood at 2%, the Bank of England’s official interest rate stood at 0.1% and there were fears that the ending of the furlough scheme would lead to a sharp rise in unemployment.
With hindsight, central banks and finance ministries were taking a risk with inflation by pumping up demand during the pandemic when the supply of goods and services was impaired. However, only a small number of people identified the risks, and even when highlighted, they were considered risks worth taking. The mainstream view was that policymakers had been right to act and that they might be withdrawing policy support too early.
Back in mid-2021, very few people other than hardcore monetarists would have predicted that by the end of 2022, inflation would peak at 11.1% – its highest level in four decades – and that Threadneedle Street would feel the need to raise interest rates from 0.1% to 5% today, in 13 successive jumps.
All eyes are on Wednesday’s inflation figures for some clue as to how the Bank’s nine-strong monetary policy committee will respond at its next meeting in early August. Another higher-than-expected figure for core inflation – the annual increase in the cost of living, excluding volatile items such as food and energy – will make a half-point jump in interest rates more likely and leave the financial markets anticipating further increases over the coming months.
Those who remember the recession that accompanied the financial crisis of 2008 will not be fooled by the apparent resilience of the economy. Then, as now, the Bank was slow to spot the fragile state of the economy and was contemplating raising interest rates only weeks before the collapse of Lehman Brothers put the entire global banking industry in jeopardy.
So here’s a prediction for you. There will be no going back to the economic orthodoxy of the pre-2008 era. Instead, the choice will be between varying forms and degrees of unorthodoxy, with the left, the right, the Keynesians, the Hayekians and the greens all having their own ideas.
Two years from now, interest rates will be well below 5%, fears of a wage-price spiral will have been forgotten and the commentariat will be wondering why the Bank continued to drive interest rates higher and higher during 2023 when the warning lights were flashing red. Threadneedle Street will be seeking to boost activity. Bazball will be back in fashion.
