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3 hours ago
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Recent days of market turmoil have elicited some extraordinary responses. The fact that investors are demanding higher rates to lend to the UK government apparently puts this Labour government in the same position as Liz Truss in 2022, according to some Labour MPs, or as Denis Healey facing the International Monetary Fund in 1976. Others dub the UK’s current position as stagflation, a term redolent of the 1970s, with their stagnant economy and runaway inflation.
The problem with these comparisons is that the latest raft of key economic figures do not bear them out – not quite. The first bit about the stagnant economy is broadly correct: over the three months to November, GDP did not rise at all. But inflation isn’t running away. Indeed, at 2.5%, it’s just above the Bank of England’s target and, crucially, price pressures, both in the service sector and stripping out food and energy, have abated. Seen against these numbers, Sir Keir Starmer isn’t facing an acute domestic crisis. Instead, the UK economy just looks chronically weak.
Since the banking crash of 2008 and its long, austere aftermath, the UK economy has enjoyed tepid growth at best. After the pandemic, inflation surged around the world. Prices remain high, fuelling discontent against many governments and helping to usher in Donald Trump. But they are no longer rising at the same rate.
“Change”, promised Sir Keir last July. The public will not wait for ever. Yet the result of low growth and high prices is a continued assault on our standards of living. Looking at the Office for Budget Responsibility’s last economic outlook, published to coincide with the October budget, households’ take-home pay is set to be squeezed every year between 2025 and 2028. This comes hard on the heels of the longest squeeze on households since the Napoleonic wars.
One result of this week’s figures is to open the way for the Bank to cut interest rates as soon as next month, and perhaps to lower borrowing costs further over the course of this year. With inflation low and households under pressure, one priority for the UK should be to keep lending rates as low as possible. This raises some sharp questions for the Bank’s governor, Andrew Bailey.
The Bank is now pursuing a programme of “quantitative tightening”. In essence, this means selling back tens of billions pounds worth of the government bonds it bought after the banking crash. During the crisis years, the priority was to keep rates at rock bottom; now Threadneedle Street wants to “normalise” them. This makes sense, but Mr Bailey could afford to be more flexible in the timing – and the chancellor, Rachel Reeves, should encourage him to do so. For the Bank to sell lots of gilts into the market while the government is also issuing gilts means deluging buyers, possibly driving down prices and therefore driving up rates. The danger of that is heightened when bond markets are facing turbulence.
From Ofcom to Ofgem, regulators are under pressure from the chancellor to do more to boost growth. Ms Reeves should also apply this rubric to the Bank and ask it to show more agility in its quantitative tightening. This would not compromise the Bank’s monetary independence; rather, it would help the Bank keep rates lower and closer to the benchmark. As moves go, it may sound minor and technical, but it would boost the economy and keep the Bank and the Treasury facing in the same direction.
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