Risk of slump

Economists urge Bank not to raise interest rates

Bank of England
The Bank of England is expected to raise base rate today (pic: Terry Murden)

A group of independent economists that shadow the Bank of England’s Monetary Policy Committee (MPC) have called for interest rates not to be increased further or risk harming the economy.

The call comes as the Bank of England is expected to put up the Bank Rate today from 5% to 5.25% in what could be the last but one rise now that inflation appears to be heading downwards.

The Institute of Economic Affairs’ Shadow Monetary Policy Committee (SMPC) said that there would be no need for today’s increase because of weak growth, a weakening labour market and the easing of supply-side pressures. 

One dissenting member argued that a further hike of 50 basis points was necessary to prevent inflation from “becoming embedded in the economy”.

A majority of the SMPC also voted to pause Quantitative Tightening (QT) – a contractionary monetary policy that aims to decrease the money supply and slow the economy. This marks a shift from the SMPC’s May meeting when only two members voted to suspend QT entirely. 

The SMPC was among the first groups to warn that loose monetary policy during the pandemic necessitated higher interest rates in July 2021.

However, the Committee now says further monetary tightening should be paused until the full impact of recent rate rises and quantitative tightening becomes clear.

The members, nevertheless, cautioned against an interest rate cut on the basis that the Bank of England has lost too much credibility in tackling inflation to do a volte-face.

SMPC members highlighted the reduction in lending to companies and financial institutions and the risk of a “payment shock” as 1.6 million fixed-rate mortgage deals are set to end by mid-2024 – resulting in some reduction in household spending. They also noted that headline inflation rates are already beginning to fall across developed economies.

Trevor Williams, chair of the Shadow Monetary Policy Committee and former chief economist at Lloyds Bank, said: “It will take some time for previous rate rises and falling global commodity prices to feed into lower inflation.

“But, in the meantime, further rate rises by the Bank of England are unnecessary and could do some economic damage without lowering inflation any faster.

“The UK economy is on the precipice of a sharper slowdown. There has already been a contraction in the money supply, with less liquidly available for loans, lower house price inflation, and slowing economic activity, as shown in the sharp fall in the Purchasing Managers’ Index (PMI) for manufacturing.”

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