Despite believing that Britain is already in the early stages of a recession, the Bank of England voted to raise interest rates by 0.5 percentage points at the latest meeting of its monetary policy committee.
That’s the first unusual aspect of the latest pronouncement from Threadneedle Street. In the past, a slowing economy – let alone one already going backwards – would be the signal for lower borrowing costs.
Yet the Bank is stepping up its action. The MPC has now tightened policy at seven meetings in a row, and having been content with quarter-point increases earlier this year has now plumped for back-to-back half-point jumps.
It is also clear the committee thinks rates will need to go still higher in the coming months. The Bank is assuming the chancellor Kwasi Kwarteng’s mini-budget on Friday will add to inflationary pressure and will make a “full assessment” of its implications before the next meeting of the MPC in November.
There was nothing in the minutes to suggest the MPC was ready to pause its tightening cycle. “The labour market is tight and domestic cost and price pressures remain elevated,” it said.
Three members – Catherine Mann, Jonathan Haskell and Dave Ramsden – wanted the Bank to join the US Federal Reserve in raising rates by 0.75 points. Swati Dhingra – attending her first MPC meeting – thought a 0.25 point increase was sufficient given the weakening of the economy.
Nor was an increase in interest rates the limit of the Bank’s action. It also announced it would reduce its stock of government bonds by £80bn over the next year in a gradual reversal of its quantitative easing programme. When the Bank was buying bonds it was seeking to boost spending power in the economy: now it is seeking to do the opposite. The Bank is keeping its foot firmly on the brake.
Up until now, the main criticism of Threadneedle Street has been that it has been too slow to act, waiting too long before responding to the pick up in inflation since the middle of 2021. There will be those who think the MPC is still being overly cautious and that it should have followed the Fed and the European Central Bank in being more aggressive.
But monetary policy works with a lag and there has been no growth in the economy since the start of the year. The Bank may soon be facing the charge that it has been guilty of overkill.
