LONDON — The Bank of England has no good choices when its Monetary Policy Committee meets in August to reconsider the base interest rate.
- If it leaves the interest rate unchanged, inflation in the UK will go unchecked. Inflation is already 2.9%, and rising prices are hurting living standards.
- If it raises the rate — to crush inflation — it could hurt GDP growth, which is weak (0.2% quarter on quarter).
It’s a classic Catch-22. No matter which choice the BoE makes it hurts workers, either by leaving inflation to eat away the value of their wages or by jeopardising the economic growth their jobs are dependent on.
The BoE’s Monetary Policy Committee is balanced in favour of low-inflation doves:
- Mark Carney, dove
- Sir Jon Cunliffe, dove
- Gertjan Vlieghe dove
- Ben Broadbent, dove
- Andrew Haldane, dove but moving to hawk?
- Ian McCafferty hawk
- Michael Saunders, hawk
- Silvana Tenreyro, unknown (she is new)
- Recent past members
- Kristin Forbes, hawk
- Nemat Minouche Shafik, dove
Former dove Andy Haldane has recently made noises that suggest he is concerned at the way inflation is hurting the poor. He may be ready to join the hawks. Haldane told The Guardian during a trip to Wales recently:
“The reason we absolutely are sitting up and paying attention now to rises in the cost of living — inflation is up to almost 3% — is not just because that is in breach of our target but because that is having big and serious consequences for those on the lowest incomes in society and that came across loud and clear today.”
He heard from one Welsh worker who described visiting multiple shops in order to save 10 pence on a loaf of bread. Haldane said the phrase “self-imposed austerity,” which he heard from another low-income worker in Wales describing how parents were withholding their children from school trips in order to save money, had particularly struck him about the damage that rising prices do to the poor.
The frustration for the BoE is that with interest rates near zero (currently 0.25%) and the economy at technical full employment, wages ought to be rising rapidly. They are not, in large part because the gig economy has broken the supply/demand link that used to help wages rise. Haldane has characterised this as a return to self-employed/artisanal work patterns not seen since before the beginning of the Industrial Revolution in 1750.
The lack of wage-growth inflation suggests there is still “slack” in the labour market despite full employment, which would call for rates to remain low to fuel demand. But low rates will further fuel the inflation that makes workers poorer … and so on.
The decision depends on whether you believe the economy is moving into a period of steady growth (which might bump up wages) or weakening as the 2019 Brexit deadline approaches (which might temper inflation).
Today’s data on UK Services PMI — a measure of future orders expected by managers in the services industries, which make up 80% of the UK economy — suggest the economy is weakening, but not by much.