Sluggish Bank of England is still behind the curve

Andrew Bailey tells us he is walking a narrow path. On the one side is the chasm of recession, offering a plunge into falling living standards not seen for decades. On the other is the cliff face of inflation, already at a height not seen for many years, and set to go higher. It’s not a happy prospect, but yesterday the governor’s Monetary Policy Committee at the Bank of England forgot its mandate and stumbled on the rocky road – again.

Raising Bank Rate for five straight months sounds aggressive and purposeful. In reality, it shows that the MPC is limping along trying to catch up with events. Bank Rate, at the dizzy height of 1.25 per cent, is still at a level more appropriate to a banking crisis than to conditions of runaway retail prices. Earlier this week, the US Federal Reserve gave the MPC the perfect chance to go for a 0.50 per cent rise when it raised its rate by 0.75 per cent. As the Fed’s commentary pointed out, this was necessary to try and get on top of inflation, and the warning was of more to come.

Yet US inflation is below that of the UK, in what is a far more resilient economy. The point of giving the Bank of England its independence was to allow it to take painful decisions which politicians might prefer to duck, and that gave the markets confidence to lend to the British government at prices which would guarantee the buyers’ losses should inflation rise. Well it has, and they are.

This is why the MPC’s decisions are not just some technical adjustment, away from the real world. Quantitative easing, that policy of buying in government debt to stimulate lending and suppress yields, is being replaced by quantitative tightening, removing the Bank as the buyer-at-any-price from the market. If the traders in government stocks sense weakness, or lack of resolve to fulfill the mandate, yields will rise, making the new debt an incontinent Treasury must issue more expensive.

Yields – and hence the cost to the taxpayer of new debt – are already rising. The UK government must pay 2.5 per cent for 10-year money, and a buyer of a 10-year government stock a year ago would be sitting on a capital loss of 15 per cent. If things go badly – a summer of strikes, plus more policy mistakes – this could be just the beginning of a bear market, so the MPC’s decisions matter.

The slightest indication that the committee is trimming its decisions towards the will of the economically illiterate Johnson government, or that its members agree with the governor about that narrow path, and stock prices could fall a long way. It is not just the nasty fact of inflation that should worry us, it is the fear that the market’s trust in the Bank of England’s will to tackle it with whatever it takes to fulfill its mandate could evaporate. That mandate, in case the MPC’s members have forgotten, is to aim for an inflation rate of around 2 per cent. This week’s decision makes it that much harder to believe that they mean it.

A bear looms over housing

Nowhere is the pain from rising interest rates going to be more acute than in Britain’s housing market. A generation has grown up to view a combination of almost-free money and ever-rising house prices as normality. Thanks to the way we view these things, inflation in house prices is somehow seen as a good thing, while elsewhere it is the bringer of misery.

Since we have an administration that equates home ownership with voting Conservative, whenever the housing market shows signs of weakness, another way is found to subsidise the buyers. From prudential rules that force the banks to offer cheap mortgages, to Help To Buy (builders yachts), stamp duty holidays and special saving schemes, there cannot be many more imaginative ways to commit the buyers to today’s prices.

They might have a care. All the ingredients for a bear market are present, with higher interest rates the key. In the distant past, when mortgage rates looked too painful to bear, the government subsidised the building societies to keep them down – to 9.5 per cent. Today’s buyers would be bankrupt long before mortgage costs reached half that level. As one MP asked at the time: “Is there anything this government is not prepared to subsidise?” Today, we know the answer.

Electrifying stuff

Another small step along the road to make electric cars pay their way this week – the £1,500 grant for the cheaper electrics was summarily withdrawn. The predictable howls of rage from the usual suspects dominated the coverage, but this is surely no more than a sensible, if modest move. The real cost of the forced switch from petrol and diesel has hardly been acknowledged yet, let alone quantified.

The electric subsidy for company cars is so big that it’s extraordinary that there are any other sales, while the pretense that they don’t cause congestion is one of the wonders of the age. Meanwhile, the tax on conventional cars will yield £26bn in duty (before the 5p a litre cut, but that is more than offset by the extra VAT on rising pump prices).

The scrapping of the grant was accompanied by the usual meaningless guff from the Transport Minister about how marvellously successful the subsidy had been. This is just the start. Road tax and congestion charging should be next, presumably accompanied by some further hit to those of us holdouts who do not believe in the electric revolution.