Bailey’s last desperate throw of the dice

Sow the wind, and you will reap the whirlwind. The foul weather has finally caught up with the sleepwalkers at the Bank of England’s Monetary Policy committee, forcing the biggest rise in Bank Rate since this round of rises started. Faced with criticism from all sides, did the MPC panic yesterday?

Perhaps. In practice there was little choice. Governor Andrew Bailey’s credibility is shot. Nearly all his pronouncements in the last 18 months now look naive at best, and shockingly poor judgment at worst. Another policy error on the side of optimism, and he would surely have had to go.

If by some miracle 5 per cent Bank Rate turns the tide on inflation without a recession, he might survive to complete his term. The team at Capital Economics, among the first to forecast 5 per cent, do not rate his chances. Their best guess is that another turn of the monetary screw will be needed before inflation is finally subdued.

There is no mileage any more in claiming that UK inflation is not far out of line from other western economies, the straw the government has been clinging to as rates have risen. Almost everywhere else it is falling fast. Only here has it now got such a grip that it risks becoming endemic. The public sector wage settlements, agreed after so much misery, now look unlikely to last another year.

It is hard to imagine a worse economic outlook: a government up to its GDP in debt, still needing to borrow over £20bn a month despite record levels of taxation, and interest rates at a level to threaten the lives of many businesses. It’s a baleful combination after “thirteen years of Tory misrule” as Harold Wilson once put it.

Predictably, the administration is blaming external shocks, but the policy errors are legion, with the MPC’s wilful ignorance of the power of money only the latest in a long line. The government has squandered tens of billions on vanity projects like HS2, while successive prime ministers and chancellors have assumed that inflation was yesterday’s problem, so they could spend whatever they liked.

Chancellor Sunak’s furlough scheme introduced the idea of being paid not to work, and the true price is only now becoming apparent. The feeling that any problem needing money can be solved with another bung from the taxpayer is rampant.

Above all, there is no indication that anyone in the administration has any idea of how business works, treating it as a cash cow to be milked as often as is needed to make the forecasts vaguely credible. In many industries, forward planning is almost impossible.

No government can afford to tell the unvarnished truth, except maybe this one might do so. The prospects are horrible, and just servicing government debt will soon become the biggest call on the Exchequer. Rishi Sunak might consider admitting he has nothing to offer but blood, toil, tears and sweat. Oh, and it’s still not too late to scrap HS2.

Turning £2 into £1

I always rather liked the £2 coin. It is a good weight, and like a magnum of claret, seems more generous than a pair of pounds (or standard bottles). Yet it has never really caught on, and this month’s 25th anniversary of its first issue has passed almost unnoticed.

Inflation has nibbled away at its purchasing power, so today the £2 coin buys much the same as the £1 coin did in 1998 – rather less if your preferred index is the old Retail Prices Index, the measure that economists and the Bank of England would rather died quietly in a corner today. Last month the RPI was 11.3 per cent higher than in May 2022, significantly worse than the Consumer Price Index which confounded the pundits by going up when it was expected to go down.

The rise finally gave the lie to the excuse that we’re not so much worse than other western countries. We are. Employees are exploiting labour shortages, or using their public sector monopolies to impose higher wages. It is not quite impossible to become a train driver, but you would have to join the queue.

Our Podcast, A Long Time In Finance, is free on Spotify or Apple apps. With Jonathan Ford.

Write to us with your comments to be considered for publication at letters@reaction.life