The Bank of England should be brave and cut interest rates

Here are two sharply conflicting stories giving a snapshot of what is happening on the ground in Britain today. On Monday, around 680 workers were called to the Bradford HQ of their employer, Safestyle, to be told that the country’s biggest window and door manufacturer was bust and their jobs were no more. 

In distressing scenes reminiscent of the 1970s, Safestyle staff were not even allowed into the building. They were told they had lost their jobs by the administrator over a tannoy in the HQ’s car park. In the pouring rain. They were told that most of them would receive their final pay cheques but some – who were paid weekly and were still owed for last week – would have to chase any money they were due through the Redundancy Payment Service. 

As you might expect, the GMB union representing around half of the workers, is up in arms at the treatment of its members, and particularly those who have yet to be paid. Officials are also indignant that no one from the Safestyle management had the courtesy to address its now former staff, leaving it to the administrator to give the message.  

And it’s a bleak one: the closure will devastate the community around the manufacturing site at Wombwell, near Barnsley, where so many people were employed, including many hundreds more who worked in the supply chain. 

The GMB also points out that up until late on Friday, Safestyle was still spending a fortune on social media advertising its products. They are right to pose the question as it was also on Friday that Safestyle’s bosses asked for the company’s shares to be suspended on the AIM market. 

For its part, Safestyle says it had no other option but to appoint administrators. It explained that trading has been terrible because of the collapse in the housing market over the last year, and that high inflation and fragile consumer confidence meant demand for its products collapsed. 

In the first half of the year, pre-tax losses more than doubled to £6.7 million. A wet summer and then a warm September made trading worse and, earlier this month, Safestyle warned that it could violate its debt covenant should losses be worse than anticipated. 

Attempts to find a buyer have not been successful despite having recently received new orders. 

With house prices falling, mortgage rates about to soar higher still for those who are coming off fixed rates and house sales collapsing, who would want to be investing in a company which makes and installs new doors and windows?

For now, no one. Even house builders and land developers are so pessimistic that they have gone underground. Others are just hovering with money to spare: the CEO of one property developer tells me his company has several million cash in the bank after selling land with permission for much-needed housing. The cash in the bank is now earning £250,000 a year at the current interest rate of 5.25 per cent. 

Yet such unexpected riches do not mean his company, which now has more money to invest, will be looking at new projects. Quite the reverse. Instead, he is bunkering down to see what pans out over the next few months, to see whether the UK will fall into recession as high interest rates are still working their way through the economy because of the long time lag. 

Both stories demonstrate how higher interest rates are doing exactly what the Bank of England intended in its fight to curb inflation: squeeze out demand. And it’s worked. Yet there will be more pain to come as the impact of higher rates will gather pace over the next year, even without having to push them up anymore. 

 The latest figures from the Insolvency Service show the fragility of the UK’s corporate balance sheet: company insolvencies are now at their highest levels since 2009 in the aftermath of the financial crash. Since the start of the year to September, more than 18,000 companies were declared insolvent, mainly due to higher interest rates, higher debt levels, falling demand as well as the end of pandemic-era support packages. In other words, a perfect storm. 

Which is why the decision by the Bank of England’s Monetary Policy Committee when it meets tomorrow (Thursday) is so extremely important. Until only a few days ago, most of the debate had been about whether the Bank should raise rates again or pause them at 5.25 percent, as it did at its last meeting.  

But now there is a change of tune. A growing number of economists are calling for the MPC to cut rates, and for obvious reasons. As the experience of Safestyle and so many other small companies suggests, the UK economy is grinding to a standstill, with some indicators suggesting that growth is now contracting. Money supply is also contracting sharply, one of the most important indicators which the Bank’s MPC committee has largely ignored.  

Yet there is much evidence to show that inflation is easing up. Figures earlier this week from the British Retail Consortium and NielsenIQ show that food inflation in October was 8.8%, down from 9.9% in September, the lowest since July 2022.  The overall rate of shop price rises, and the pace of non-food inflation, was also lower than food inflation and both were on the decline.

Economist Julian Jessop argues that the MPC should cut rates back to 5 per cent and stop quantitative tightening, the selling of bonds back to the market. He says the fall in money and credit growth tells us far more about where inflation is heading than the backward-looking data on prices or wages. 

Indeed, Jessop adds that worrying about strong wage growth makes even less sense when there are labour shortages: “Wages are a price like any other and need to be allowed to adjust to balance supply and demand.”  

There is all the more reason to cut, he claims, as the Bank was already forecasting that inflation would fall below the 2 per cent target if rates stayed at as they are. Another rate-cutter is Ben Ramanauskas, economist and former government adviser. He says whether to hold or raise rates again is the wrong debate: whether to cut or not is the right one because continuing the current restrictive monetary policy is damaging the UK economy and could tip us into recession. What’s more, the new energy price cap coming into force in October, along with other supply side issues being resolved, mean that prices are coming down.

He takes the same view as Jessop, saying that other grounds for supporting a cut is because although inflation is above target, it is actually much lower than where the Bank had expected it to be at this point. “What is more, Producer Price Inflation has fallen and annual rates have turned negative which should mean lower costs continue to be passed onto consumers.” 

Like Jessop, he points to the sharp fall in money supply. Ramanauskas adds: “Moreover, money and credit growth has slowed significantly. This has received very little attention in most of the commentary around inflation. Milton Friedman wasn’t quite right when he famously said that ‘inflation is always and everywhere a monetary phenomenon’ as we know that inflation is not just about the money supply.”

However, the supply of money and the growth rate of that supply really does matter, argues Ramanauskas. Given that money growth has slowed, we should expect inflation to continue to fall.

There are many solid reasons why the Old Lady should keep rates as they are. Yet if the Old Lady were a little bolder and was brave enough to look ahead a year or so, she might lift her skirt and trim rates back to 5 per cent precisely because growth and inflation are much weaker than the Bank’s own forecasts. Showing a little leg might just be the shot of confidence that is so badly needed to lift our spirits. 

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