The Chancellor yesterday used a Goldmans forecast to propose the Bank cut interest rates six times by the summer of next year. She says she believes in Bank independence, so this was a silly thing to say. She will argue she was quoting someone else but she chose to quote one of the forecasts expecting more cuts because she wanted to make it clear she wants rates down. She has been damaged by the surge in the ten tear rate to 4.9% recently, well above the short term one day spike in the ten year at 4.38% which she said crashed the economy in 2022. The knock on to mortgages is not helpful for a government wanting a 50% plus rise in housebuilding.
Too many MPs misunderstand Bank independence. It is only independent to fix the overnight base rate or MLR. It is otherwise wholly owned by the state, its Governor is appointed by the government and answers to them and to Parliament’s Treasury Committee, and it has a full indemnity against losses on its bonds. It needed Government approval for all its QE bond buying.
In recent years I have not called for it to lose its independence over rates, and I have not provided a running commentary on what rate it should set. I see the theory, that a panel of experts with a main task of keeping inflation to 2% should be able to do a better job than elected politicians wanting lower rates to help win an election.
We need, however, to see that the practice has not followed the theory. The Bank took us on a wild ride, debauching our money with ultra low rates and massive bond buying, driving inflation up to 11% or 5.5 times target. It then crashed the economy, selling bonds at huge losses and driving rates up. It blamed the inflation on war and energy, ignoring the fact that inflation was 3 times target before the war, and ignoring the way Japan, China and Switzerland kept inflation near 2% despite war and dear energy.The Bank has proved hopeless at predicting the inflation rate it is meant to control because its economic model is poor.
If the Chancellor really wants growth she needs to change Bank policy on bonds where they are not independent. The Bank has cut deep into fiscal policy with its losses . Meanwhile Mr Trump will try to lecture the Fed into lower rates, after they too have given the US a nasty inflation and are now restricting credit.