The BoE can’t blame sky-high prices anymore. Consumer price inflation fell to just 2.3 percent in April, just a whisker above the its target of two percent.
Last time inflation was around this level, three years ago, base rates stood at just 0.1 percent. So why are they more than 50 times higher at 5.25 percent today?
It’s not as if the UK is running red hot and house prices are going through the roof. Quite the reverse. As we learned this morning, economic growth has flatlined.
Today’s base rate makes zero sense.
The BoE’s monetary policy committee (MPC) is said to be concerned about core inflation, which cuts out volatile elements and is stickier than it would like.
Yet the direction of travel is clear. Inflation is on the run. The next set of figures for May should confirm that.
The BoE has to act. Instead, it’s found something else to worry about. This one makes even less sense.
Wages are growing too fast for its liking. Take a look at your pay packet, and see whether that reflects your experience.
UK earnings haven’t risen since the financial crisis in 2008, the longest period of stagnation in our history.
Finally, wages have started to pick up, climbing six percent over the last year. This is putting a bit more money into people’s pockets, and the BoE doesn’t like it.
Governor Andrew Bailey has moaned before that we earn too much and should stop asking for wage increases. Yet wages are having only a marginal impact on prices.
It’s not just me saying that. Jeremy Batstone-Carr, respected economist at Raymond James, is boiling with frustration, too.
He’s frustrated with the BoE and European Central Bank for fretting about wages when their impact on inflation is only “slight”.
By keeping interest rates at today’s high levels, Batstone-Carr warns they’re tearing society apart as our “sclerotic economy… is proving such a rich breeding ground for populist discontent”.
The BoE has been detached from reality for years. It approaches inflation as an academic problem but keeping rates too high is causing problems in the real world, as mortgage borrowers pay hundreds of pounds more once their cheap fixed rate deals end.
Arrears are growing as a result. People are losing their homes.
Would it hurt to deliver a small symbolic rate cut of 0.25 percent at its next meeting on June 20? That would still leave rates sky-high at five percent.
It’s astonishing to think that just a few months ago, two MPC members were voting for rate hikes.
Now the MPC appears to have found yet another reason not to cut rates in June: the General Election.
The BoE doesn’t want to be seen to favour the Tories, as a rate cut would deliver a rare positive as the country goes to the polls.
Yet by deliberately holding rates steady the BoE is intervening in the election anyway, only this time in favour of Labour.
It needs to forget politics and do the right thing for the economy.
Hard-up homeowners can’t wait until August until the first rate cut (the MPC may find another excuse not to act then).
The European Central Bank is a byword for caution but even it has just taken the plunge, cutting rates from four percent to 3.75 percent last week.
The EU’s borrowing costs are now a full 1.5 percent lower than ours. That makes no sense.
With yesterday’s figures showing UK unemployment rising and vacancies falling, the MPC should forget about core inflation, rising wages, Rishi Sunak and Uncle Tom Cobley, and cut next week. I’m not holding my breath, though.
