The Bank of England is crazy to reduce interest rates

[LargeDeviation]

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.

Please can someone answer a question for me, as I'm a bit stupid when it comes to economics?

So, if the reason the BOE feel it's the right time to reduce interest rates, as inflation is low, what happens if the public sector receive the 5.5% pay increases, and the junior doctors receive their pay increases? Won't this then increase inflation? And, if so, will interest rates have to come down again? I'm confused.com

I may not always agree with their decisions, though prefer this method than having the Chancellor set the rate. Just remember who some of the Chancellors of the Exchequer have been in recent history.

The MPC has 5 internal members (governor, chief economist, 3 deputies). They are groupthinkers par excellence. The ultimate Old Boys club.

The external members are appointed by the Chancellor. So a chancellor can appoint all doves or all hawks depending on their viewpoint. So far, no chancellor has appointed data scientists (who can actually make sensible predictions) rather than economists.

I think all prospective candidates should have to shadow the MPC for a year beforehand and make predictions of various macro indicators conditional on the path chosen. Then the Chancellor can make informed choices on who to appoint based on who makes accurate data-driven predictions.

The Bank have made it clear that this will probably be the last reduction this year. They are waiting to see how above-inflation pay rises, for some workers, affects the economy.

I’m not an expert either (did some 8n my degree but that’s a loooooooong time ago now). As I 7nderstand it, inflation wasn’t driven by demand this time but by massive fuel cost increases and their knock on. Paying public sector workers something that will address the pay deflation they’ve put up with for 10-15 years won’t affect it and might boost the economy. Also a load of it will come back in tax anyway.

Thank you so much. That makes perfect sense!

No problem @Ihateboris (so do I). Others may disagree. Economics is as much an art as a science.

Dark chocolate up 16.6% per 100g at Sainsburys this week vs last week.
Food inflation is still an issue. Yes that is just one product but if food overall is increasing in cost, then will this rate reduction help at all to reduce that? Maybe it will reduce the debt repayments of supermarkets (are they in debt?) and will it result in them reducing prices?

Those on a tracker mortgage may see a change to what they pay, but I don't expect rates generally will change. New mortgage approval rates likely have already factored in a reduction.

I thought there was going to be a possible second reduction in the autumn?

May be wise to point out that not all mortgage holders will see a reduction, your lender doesn’t have to pass it on . Hope yours does if it helps of course.

As someone who knows nothing about economics, all I want to know is if this means my mortgage will go down!

@Bex5490 , if you have a tracker mortgage, yes - probably. On a fixed rate for a fixed period, less likely.

Not necessarily- they may not respond to it at all an and it could take a while, but I think many are hoping there will be a reduction.

Well fingers crossed because as someone who’s fixed mortgage ended the month before everything went up…I could really do with a little luck!

The average of fixed rates already dropped in anticipation of this.

@LargeDeviation
Please can you explain how public sector pay rises increase inflation? As most sources that I’ve seen indicate they (mostly) don’t.

They (mostly) don’t because they don’t add costs to production of something for sale. They sometimes do if there are enough with enough of an increase to drive demand led inflation. I’m not the person you asked, but that’s my understanding.

The public sector pay increases were badly needed and will be welcomed, and Andrew Bailey himself has said that, to the best of his knowledge, they will not be inflationary:

amp.theguardian.com/business/live/2024/aug/01/uk-house-price-growth-rises-bank-of-england-interest-rate-decision-looms-business-live

Andrew Bailey has just advised, on BBC News, not to expect that. They are worried about services inflation and high wage growth,

I’m sure lots of people got pay rises this year, because there’s no reason for that not to happen. And presumably it was your choice to take a pay cut and nobody forced you to. I’m assuming you could have got a pay rise, but instead chose a route where your pay decreased (I think it’s fair to assume that).

Why?

The interest rates probably should have gone down a couple of months ago but some idiot decided to call a general election which made it impossible to do so whilst campaigning was happening (because that would have been seen as a political move to support the then government).

So I think this rate drop is actually one from a short while ago that's merely been delayed for that reason. So the most recent data might look quite as good as it did but what happened a couple of months ago is still sufficiently good to justify a small rate cut.

It's just quite a lot of people who has renewed their mortgage within the last few months got a worse deal than they probably should. (RTB: waves grumpily).

The lenders had already moved to cut rates as soon as we had the election as the BoE had signalled they were likely to make this cut. So I'm not sure rates in the market will actually reduce much more due to this latest rate as the market has already adjusted for it.

What are your qualifications/ background to justify this tone?

You seem to clearly have some insight considering you quote some valid sources, but I'm not sure 'Bank of England economists are all idiots' is a good way to get someone to listen to you.

Have you considered applying for senior jobs in the field where you can influence things if you know more than them, are clearly frustrated and feel things need to change?

Thank you, I have basic common sense but limited understanding of economics. So “demand led inflation” means -

people have more money to spend (hooray!)
so can buy more ‘stuff’
so the producers of ‘stuff’ put up prices just to increase their profits (boo!)
(which, to be fair, is their pay rise)

I guess that’s capitalism.