Monetary Policy Committee meeting, Bank of England 22/6/2023

Bank Rate increased by a further 0.5%.   

The Bank of England’s Monetary Policy Committee voted to raise Bank Rate by 50bps at its meeting on 22nd June. This is the thirteenth consecutive increase in borrowing costs, which have now risen from 0.1% to 5% since December 2021, the highest level since 2008. Once again, the vote was not unanimous with two external members (Swati Dhingra and Silvana Tenreyro) of the nine-person MPC voting to leave rates unchanged at 4.5%, citing the delayed effects of prior rate rises which were still to be realised, along with the decline in energy prices. Besides long-standing concerns about the stickiness of consumer price inflation, the seven members who voted in favour of higher borrowing costs are also concerned about the tight labour market. The unemployment rate actually fell from 3.9% in March to 3.8% in April while wages increased by 6.1% in the year to April. The MPC is concerned that high inflation expectations could lead to a wage-price spiral. May’s inflation data saw overall annual CPI unchanged at 8.7%, but the core inflation rate, which excludes volatile food and energy prices, actually rose from 6.8% to 7.1%, thanks to higher costs of services.  

A spate of articles highly critical of the Bank of England has appeared in recent days. Banks are having to pass on higher borrowing costs to their customers, particularly to households with a mortgage. This has resulted in cheaper mortgage deals being pulled, especially as stubborn inflation has resulted in market predictions that the Bank Rate will be raised even higher. A slogan from John Major’s years – “if it isn’t hurting, it isn’t working” has been widely quoted. Households are going to suffer, so the dominant narrative goes, because the Bank of England failed to spot the increase in inflation after the ending of covid restrictions in 2021 and should have started tightening monetary policy sooner. In reality, the big mistake was made a year earlier. There was absolutely no need for the Bank of England to launch a new asset purchase programme. Broad money growth was not collapsing as it was in 2008. This unnecessary monetary stimulus created the huge spike in broad money growth which following the usual time lag, has caused inflation to rise to double-digit levels. Now the MPC has gone to the opposite extreme. Feeling itself under pressure to be seen to be “doing something”, its contractionary monetary policy has caused broad money growth to slump. The three months to April saw UK M4x contracting at an annualised rate of 1.9%. The annual growth rate is down to 1.6%. UK GDP grew modestly by 0.1% in April and the boost which the festivities associated with coronation of King Charles III should provide to the economy may keep GDP growth in positive territory in May. However, higher borrowing costs along with the modest but steady asset run-off by the BoE and tighter bank regulation point clearly to a steepening of the decline in broad money. Inflation will probably fall to 2% or lower by early 2024, by which time the economy is likely to be facing a severe downturn, to which the Bank of England’s only response will inevitably be a sudden dramatic reversal of this year’s rate hikes. Indeed, the biggest worry about the MPC’s behaviour in the last three years is that the so-called “Great Moderation” from the 1990s onwards is going to give way to a protracted series of boom-and-bust cycles due to its groupthink refusal to consider the importance of increases and falls in the quantity of money when determining monetary policy.

Access further details on the latest monetary developments in the UK in our monthly reports and videos at https://mv-pt.org/monthly-monetary-update/ .

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