The Bank has fluffed its chance to stop a new inflationary storm

Threadneedle Street ploughed on in with its pre-programmed cut just when the warning signs were flashing red

Businesses such as M&S and JD Wetherspoons have already said they will have to raise prices. Gilt yields have already spiked sharply up, pushing up the cost of money for companies and mortgage holders. The election of Donald Trump to the American presidency means there may soon be a tariff war, and even global agricultural prices are starting to rise again.
You would have to be completely blind not to notice that inflation is picking up again.
And yet how has the Bank of England responded? It has cut rates. In reality, the Bank has completely misread the inflationary storm that is about to be unleashed – and it may soon be too late to stop it.
Unless you have deliberately decided to block out all the evidence, it is impossible to ignore the fact that prices are about to start rising again.
Over the last week, a whole series of major British companies has said, typically with a tone of weary regret, that they will have no choice but to pass on to their customers the huge tax rises the Chancellor Rachel Reeves imposed in her Budget last month.
After all, there is no other way they can afford to pay the extra National Insurance charges, or the higher minimum wage. Gilt yields have hit the highest level since Liz Truss’s disastrous mini-Budget in 2022, making borrowing more expensive than ever.
Fiddling the Government’s debt rules is going to stoke up demand, with a big increase in borrowing and spending, at a time when we are close to full employment. In many sectors, soaring sickness claims means the workforce is actually shrinking.
The UK could probably have avoided the tariffs that Trump will soon impose, but childish virtue-signalling from Labour ministers means we probably won’t even ask for an exemption. To cap it all, on Friday, the UN’s World Food Price Index rose sharply, hitting its highest level since April last year.
Add it all up, and one point is surely clear. The global economy is very likely to see an up-tick in inflation. But the UK will be uniquely exposed to that, with our own Government pouring petrol on the flames with policies that could almost have been deliberately designed to force prices higher.
Against that backdrop, it is very clear what a responsible central bank should do. It should keep interest rates on hold, at least until the outlook becomes clearer, or else preemptively raise them to choke off inflation before it becomes embedded in the system.
The trouble is that the Bank, under its hapless Governor Andrew Bailey, has not done that. Instead, on Thursday it cut rates by another quarter point. Sure, it added in a few warnings about how the tax and spending changes will “clearly raise the cost of employment” while admitting it was worried about a “substantial loosening of near-term fiscal policy”.
And yet the Bank is not just another consultancy or think tank providing a running commentary on the economy. It is paid to make decisions. And in reality there are two big problems with its move this week.
First, it looks suspiciously like political bias. Even after only a few months, the Labour Government is already in deep trouble. Its support has collapsed in the polls, the Budget went down like a lead balloon and it appears to have no ideas apart from throwing more money at a dysfunctional public sector.
It desperately needs some help to at least stop the economy from plunging into a full-blown recession, and to stop the cost of all the extra debt it is planning from spiralling out of control. It desperately needed that cut in interest rates on Thursday to have any chance of making its plans work.
The Monetary Policy Committee may not have been consciously supporting the new Government. And yet it risks the appearance of having abandoned its neutrality, and that was surely a huge mistake. An independent Bank has to operate outside politics, and once it loses that reputation it won’t be able to get it back again.
Next, as any drummer in a jazz combo will tell you, timing is everything – and this also holds true in central banking.
Even with all the charts, data and models, steering the right path for interest rates is as much a matter of judgment as science, and no one expects any bank to always get it right. But this time around the Bank has got the timing horribly wrong.
Holding rates while the data unfolded would have been the right decision. Instead, it ploughed on in with a pre-programmed cut as if on autopilot. At a moment when it needed to show some flexibility, it completely flunked the challenge.
In reality, the Bank has had a dismal record over the last few years. It misjudged the impact that Brexit would have on the economy, launching a completely unnecessary round of quantitative easing, and then it doubled down on that as the economy locked down during the pandemic.
The result was that as inflation spiked up around the world, it hit the UK harder than almost every other major developed economy. Even then the Bank responded too late, and spent too much time blaming companies and workers for being greedy, instead of raising the cost of money.
This is hardly an institution that has covered itself in glory over the last few years.
It should be clear to everyone that inflation is about to rise again and that the UK, as so often in the past, and through our own political choices, will witness a worse spike than any other country. The Bank did not have much room left for error – and after this week it may have made one mistake too many.