I would ban all open letters. Don’t write one and never put your name to someone else’s. Open letters are petitions that went to Oxbridge and goad you into asking which college they attended. But there is one example I hold in particularly low regard: the exchange of letters between the Governor of the Bank of England and the Chancellor of the Exchequer.
This takes place any time inflation drifts away from the 2 per cent target by more than 1 point in either direction. The Governor’s note must set out the reason why inflation has missed its target, the policy action the Monetary Policy Committee (MPC) is taking in response and the horizon over which inflation should return to target. Here is Andrew Bailey’s letter today and Jeremy Hunt’s reply.
These exchanges are meant to be a visible demonstration of accountability and transparency. The MPC has a mandate but its members are not elected, the chancellor is. The reason it bothers me is that these letters give the impression that policymakers, in this case, central bankers, are more in control than they really are.
The MPC can raise interest rates – as it has done today by 25 basis points to 4.25 per cent – to try to bring inflation down. But this is an inherently blunt tool. Not only that, higher rates come with indeterminate time lags, so it is difficult to know when to stop. We use them not because they’re great but because we haven’t thought of anything better.
Higher interest rates also carry unavoidable and indeed deliberate trade-offs. They raise the cost of borrowing for households, incentivising saving and leaving less disposable income. By slowing down economic activity, they often lead to higher unemployment. They make servicing government debt costlier. And they can lead to currency appreciation, which might hurt exporters.
They also put more pressure on a global banking system which hasn’t had a great couple of weeks. Simon French, chief economist at Panmure Gordon investment bank, suggests that recent bank failures “plausibly lower how high interest rates [can] go to control inflation.”
That is because, as Bloomberg’s John Stepek points out in his must-read newsletter Money Distilled, “when given the option between calming inflation and protecting financial stability... central banks will revert to protecting stability.”
It wasn’t long ago that some thought the Bank was done with rate rises, but yesterday’s woeful inflation figures suddenly made an eleventh successive increase a racing certainty. My main observation – other than that pain is coming to a remortgaging application near you – is that no one knows what is going to happen next. The future is contingent. And where we have tools, they are limited and come with multiple downsides. Incidentally, if you purchased a property in London at or near the bottom of the 1990s market, congratulations.
Elsewhere in the paper, it was probably a coincidence that Rishi Sunak published a summary of his tax returns at 4.30pm yesterday, not only meaning he missed out on this newsletter, but also forcing him to compete for space with the Stormont brake vote and Boris Johnson’s appearance in front of the Privileges Committee.
Tldr: Sunak paid £432,000 in UK tax in the last financial year, which sounds like a lot and indeed is a lot, though with much of his income coming from capital gains, you may well end up with a higher overall tax burden.
In the comment pages, Rohan Silva says don’t be scared of AI — it will help revolutionise our struggling public services. While Victoria Hornby, CEO of the charity Mental Health Innovations, suggests her solutions to Britain’s mental health crisis.
And finally, the new London restaurant where you pay to have a terrible time. Karen’s Diner – in all its shouty, sweary glory – has arrived in town, reports Joanna Taylor.
