Hurray for Swati Dhingra. Even though she would have guessed her fellow members of the Bank of England’s Monetary Policy Committee were in a hawkish mood, she still had the guts to go against the groupthink and vote for a cut at today’s meeting.

And the associate professor at the London School of Economics has been doing so all year, voting at every meeting of the nine-member MPC to cut interest rates because she says that at this level they are  damaging consumption and economic growth.

So it’s no surprise that Dhingra was the only voice on the panel to vote for a cut of 0.25 percentage point to bring rates down to 4.75 per cent. It’s also no surprise that the Bank’s Governor Andrew Bailey and seven of his colleagues decided to hold rates because they are now overly obsessed with inflation rearing its head again.

Yet as Dhingra argued so cogently in an article back in February, borrowing her title from Simple Red’s “Money’s Too Tight (To Mention) there is a danger that monetary policy is now so tight that there are “downside risks to living standards”. 

She added: “Despite an easing in inflation and some real wage recovery, consumption remains below its pre-pandemic level. This is in striking contrast to the Euro area and the United States where consumption bounced back some time ago.”

As she also said  – and this is an important point that her fellow members of the panel seem determined not to take on board- that monetary policy needs to be forward-looking because the impact of tightening rates takes 18 months to two years or so to feed through to consumer prices in the real economy.

Dhingra went on to argue that: “The evidence to err on the side of overtightening is not compelling in my view as it often comes with hard landings and scarring of supply capacity that would weigh further on living standards.”

Normally, the MPC would indeed look ahead – and act early and appropriately. Having said that, the Bank of England was far too slow in raising rates from their historical lows after the Great Financial Crash but that’s another story.

But Dhingra makes another valid point which is that the sheer scale of the shocks which the world has endured since the Covid lockdown and the energy and food crises triggered by Russia’s invasion of Ukraine made looking ahead — and through the rear view window at the same time — all the more difficult.

You can see why Dhingra says this, although she perhaps errs on the side of being too defensive of central banking groupthink. There were many commentators who argued from early on during the pandemic that rising inflation was not transitory but endemic. Indeed, from the summer of 2021 onwards, many independent economists, including the Bank’s own economist, Andy Haldane, were arguing that rates should be raised. In the event, they were not raised until December that year.  

Now the danger is that they are being kept too high for too long. They are working. We have seen the devastating impact of penal higher rates on thousands of mortgage holders who are now paying sometimes up to twice the amount they were paying only a year ago while even those households without chunky mortgages have been cutting back on consumption.

So too have far too many smaller businesses which are having to pay through the nose for their loans, leading many to cut back on investment.

What’s staggering is that the BofE’s own grassroots data – which officials collect constantly from all regions across the country – has not woken them up to the fact that so many householders and businesses are feeling the crunch.

It’s all the more surprising that Bailey and his fellow-travellers didn’t take a hint from the Federal Reserve’s decision on Wednesday to cut rates for the first time in four years, loping off a half a percentage point to bring US rates in a range between 4.75 per cent and 5 per cent.

Whether the Fed’s decision smacks of fear is a moot point but clearly Jay Powell is worried enough about the economic landscape to engineer – as far as he can –   a soft landing. The last two times the US central bank chopped rates by this much in one go was first in January 2001 when the S&P 500 fell by 39 per cent and unemployment jumped. The second time was on September 18, 2007. And we all know what came next.

It’s often been said that the last mile is the hardest in any monetary tightening cycle. But those who believe that we have reached the peak – including Dhingra- argue that this cycle is rather different because inflation has fallen sharply without any sharp rises in unemployment or big contractions in growth, mainly because the global economy and domestic labour markets have changed dramatically since the last big inflationary periods of1970s and 1980s. Money supply has also contracted sharply.

When the facts change, so should the reaction to them. This means changing policy to adapt to new circumstances, which means not going overboard on tightening to avoid a crash landing.

Hopefully the MPC’s eight hawks will be persuaded by the logic of Dhingra’s arguments when they next meet in November if they want to avoid any nasty bumps. And maybe it’s time for a new category of bird to enter the Old’s Lady’s lexicon: Dhingra is more of a wise owl than a dove.

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