The Bank of England has held interest rates at 5.25 percent since August, some eight months ago. It has done this in a bid to take the heat out of the economy, by driving up mortgage and other borrowing costs.
Interest hikes are a blunt instrument – the aim is to make people feel poorer and spend less – but they are the only tool the BoE has.
The hikes have put massive pressure on millions of homeowners, who have been paying £500 a month more on average to service their mortgages.
They urgently need an interest rate cut, and in my view, the BoE should have acted in December or January.
The UK economy fell into recession in the second half of last year, destroying jobs, businesses and livelihoods.
Even a small cut of 0.25 percent would show the BoE gets it and will act when inflation pressures ease.
As they clearly are. Lest we forget, consumer price inflation (CPI) hit a thunderous 11.1 percent in October 2022. That’s more than three times higher than today.
The last time inflation was around today’s level was in September 2021, when it stood at 3.1 percent.
At that point, the BoE’s rate-setting monetary policy committee (MPC) thought it was absolutely fine to hold base rates at 0.1 percent.
So why does it believe rates have to be more than 50 times higher today? It makes no sense.
Until recently, two of the nine members on the MPC were actually voting to increase rates, which I simply do not get at all.
It felt completely detached from reality then, even more so today.
Talking about being detached from reality brings me to BoE governor Andrew Bailey. He’s attracted an awful lot of criticism, as people blame him for calling inflation wrong on the way up, and now on the way down, too.
A good deal of that criticism has come from me.
Yesterday, it sounded like the message was getting through. Bailey signalled that the BoE will cut rates in the coming months as he saw “strong evidence” that inflation was continuing to fall despite the resilience of the British jobs market.
Despite my criticism, I accept Bailey has a major problem on his hands.
And that’s the US economy.
The US is booming, large thanks to President Joe Biden’s trillion-dollar green stimulus programme, bizarrely named the Inflation Reduction Act.
I say bizarrely because it’s having entirely the opposite effect, pumping up the US economy and driving inflation up as the US Federal Reserve battles to bring it down.
Many suspect the Fed may not be able to cut interest rates at all this year.
READ MORE: ‘Utterly stupid’ BoE must cut interest rates now or 500,000 firms will collapse
I think the MPC should have the courage to break with the Fed and cut UK interest rates anyway. Our economy is in a much weaker state than the US, and needs a break.
There’s a problem, though. If the MPC breaks lockstep with the US and cuts interest rates, the pound will fall.
Not only against the US dollar, but possibly other currencies, too.
That could have the unwelcome effect of making imports more expensive and driving inflation back up.
Yet Bailey may have no choice.
The big inflation drop is likely to come next month, when April’s figure reflects the huge 16 percent cut in Ofgem’s energy price cap.
Analysts reckon CPI could then fall back to the BoE’s target of 2 percent. By May it could be as low as 1.7 percent, according to some forecasts.
In that case, the BoE will come under massive pressure to cut interest rates, whatever happens in the US. It could prove impossible to resist.
