Confidence has broken out within the halls of the Bank of England: It’s decided to back its own forecasts — for once. A 25 basis point cut to 5% in its official rate Thursday was a close call, with a 5-4 split. It’s a lucky break for the new Labour government to spur its growth agenda, and certainly welcome for many parts of the economy that have struggled after 14 hikes and 515 basis points of tightening since December 2021.
Nonetheless, it was delivered as a cautious first step and not the start of an avalanche of easing; the guidance that the BOE won’t cut “too much or too quickly” suggests its next move won’t come until the November forecasts are in.
After an extended period of silence from BOE Governor Andrew Bailey, who has not spoken since May 21, he was able to substantiate this first relaxation of monetary policy with the support of a full quarterly forecast review. It’s evident the governor’s view prevailed, and he took the deputy governors with him, as is usually the case. After stronger-than-expected growth in the first half, it’s logical the BOE's May forecast of 0.4% for 2024 growth was raised to 1.25%.
But it's the latest inflation forecast that's most relevant. With headline consumer prices having stuck precisely at its 2% target for the past two months, the BOE needed to get on with cutting now. It’s a confusing message as to why it still hadn’t eased on restrictive policy despite hitting its target. Inflation is expected to inch modestly upward into winter as some base effects from falling energy prices last year drop out.
This more assured approach comes after an extended bout of hand-wringing as several members -- notably Chief Economist Huw Pill — were transfixed by sticky services prices, even as goods prices were dropping precipitously. But it's surely evident prices are back under control after spiking over 11% in late 2022. While wage rises are still above the Monetary Policy Committee's preferred comfort zone, they are on a downward trajectory. Waiting until all the inflation ducks are in a row would risk unnecessary economic damage, as the jobs market is displaying some signs of stress.
The European Central Bank grasped the nettle on June 6 by being the first of the major central banks to lower rates, it may well follow with a second cut on Sept. 12. The Federal Reserve, while pausing again on Wednesday, does look as if it has, barring any major developments, set up its first rate cut for its next meeting, Sept. 18. The BOE could easily have waited for its next meeting the following day but it would look inescapably dependent upon its peers' thinking not its own. Being an independent central bank doesn't just mean devoid of political interference but also groupthink. The BOE has grasped the courage of its own convictions, hopefully in time to have avoided a policy mistake by leaving rates too high for too long.
Credit: Bloomberg
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