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Original poster

The Bank of England is crazy to reduce interest rates

60 replies

LargeDeviation · 01/08/2024 12:23

Services inflation is still rampant at over 5%.

The economy is far stronger than the Bank of England's own expectations.

The labour market is extremely tight.

On top of the monetary factors, there is massive fiscal loosening. Rachel Reeves is doling out bumper pay increases to the public sector, which will be highly inflationary.

Yet Andrew Bailey feels it is the right time to cut rates.

The Bank of England were hopelessly late in raising rates in the first place, leading to far higher inflation and eventually interest rates than our competitors. Now they are too early to cut rates, which will lead to far stickier inflation over the next few years, and having higher interest rates for much longer than required overall.

Their forecasting is hopeless, persistently underforecasting inflation.

Andrew Bailey should resign.

OP posts:
Sethera · 01/08/2024 12:56

Yay, mortgage payments going down 😃

(Sorry!)

Original poster
LargeDeviation · 01/08/2024 12:55

The internal members of the BoE MPC tend to be sheep. Huw Pill is the one exception recently, but by and large they vote as a pack.

OP posts:
Needanadultgapyear · 01/08/2024 12:54

Suspect is probably related to some industries where there is significant borrowing are making redundancies. My employer the biggest in sector in UK made third round of redundancies yesterday in 12 months, 3% of our work force went yesterday.

ruby1957 · 01/08/2024 12:51

LlynTegid · 01/08/2024 12:43

I would not have done it, but I don't consider it a resigning matter. It is a decision by nine people not one.

It was not unanimous - I understand it was 5-4 - so uit was not 9 intelligent people. Just the 4 who were against were the sensible ones.

Original poster
LargeDeviation · 01/08/2024 12:48

@Aaron95 The Bank of England's economists are idiots. That's why they had to get Bernanke in to try to shake up their forecasting methodology recently.

They have persistently undermodelled inflation, dating back to at least Carney

https://blogs.lse.ac.uk/businessreview/2021/10/20/the-bank-of-englands-response-to-rising-inflation/

Quoting: over the last 15 years, the Bank of England has, on average, under-predicted one-year ahead CPI inflation by 20 basis points per annum. The Bank’s forecasting record is slightly worse two years down the road. Indeed, the Bank has under-predicted two-year ahead CPI inflation by an average of 32 basis points per annum.

The Bank of England’s response to rising inflation

Rising inflation has added pressure on the Bank of England’s policymakers to respond by tightening monetary policy. But, Costas Milas asks, will they do so?   Quite often, students in economic…

https://blogs.lse.ac.uk/businessreview/2021/10/20/the-bank-of-englands-response-to-rising-inflation

OP posts:
Original poster
LargeDeviation · 01/08/2024 12:43

Consider the recent data:

Chinese export prices: higher than Bank of England expectations
GDP growth: stronger than Bank of England expectations
Overall inflation: 2.0% last snapshot rather than 1.9% expectations
Pay growth: in their own words, 'pay growth had remained in excess of rates explained by Bank models'
Services inflation: in their own words, 'higher than expected at the time of the May Report'.

So data comes in more inflationary than expected, and yet they decide to cut rates... Andrew Bailey simply hasn't got the guts to be an effective central bank governor.

OP posts:
LlynTegid · 01/08/2024 12:43

I would not have done it, but I don't consider it a resigning matter. It is a decision by nine people not one.

MugPlate · 01/08/2024 12:41

It’s a tiny drop. Don’t worry about it.

Aaron95 · 01/08/2024 12:38

I prefer to think that the people i charge of the Bank of England know more about ecconomics than we do. Yes there are unknowns and ecconomics is not an exact science but I suspect their decisions will be more informed than mine or any other MN user.

Greenbike · 01/08/2024 12:31

Headline and core inflation are at target. So what if services inflation is higher. There will always be some component of inflation which is higher. Rachel Reeves is not doing any fiscal loosening. She’s giving a pay rise to a tiny proportion of public sector workers which will have a near zero impact on inflation. She has strongly indicated overall spending restraint and imminent tax rises. Not doing anything would be an effective hike given that the Fed and ECB are both on a cutting path.