Monetary Policy Committee meeting, Bank of England, 4^th August 2022

Sixth increase in the Bank Rate – this time by 0.5%     

The 0.5% increase in the Bank Rate announced by the Bank of England’s Monetary Policy Committee of the Bank of England was widely anticipated. The last six meetings of the MPC have each concluded with an announcement of higher borrowing costs, which have now risen by 1.75% in total in the space of eight months.   It was the sixth consecutive announcement of a rate rise following an MPC meeting. In a repeat of the voting pattern in May’s meeting, the three dissenters wanted a larger (0.5%) increase. Interest rates are now at their highest level in 13 years and further rate hikes may follow. The statement issued after the meeting made it clear that if inflation proves persistent, the Bank would “if necessary act forcefully”. Consumer price inflation hit 9% in the year to April and the Bank is perhaps being somewhat more realistic in its assessment of inflationary prospects in the coming months than some other central banks. A peak of just over 10% is anticipated in the final quarter of this year.

The statement contained an analysis of what the MPC believes to be the underlying causes of inflation. Global energy price shocks and the war in Ukraine are both mentioned, along with the tight domestic labour market. Conspicuous by its absence is any mention of the surge in broad money growth in 2020 which the Institute of International Monetary Research has consistently identified as the main cause of the current inflationary surge. There is a danger that the exclusion of money from its considerations will cause the MPC to adopt a policy which will cause M4X to contract and thus lead to a recession within two years. In The Bank of England appears to have adopted a highly contractionary monetary stance at a time when broad money growth is collapsing. UK M4x fell by over £2.1b. during June, the sharpest monthly decline since July 2017. This caused the annualised growth rate of broad money to fall from 6.9% in the three months to May to 2.8% a month later. Besides increasing the bank rate (which inhibits the creation of new bank loans and thus the creation of deposits, which are money), the BoE is also actively reducing its balance sheet. Assets purchased in 2020/21 to the value of £3.2b. mature in July and the money from these will not be reinvested.  This action will further slow broad money growth. 

The MPC reiterated its determination to return inflation to its official 2% target. In the short term, today’s rate hike is unlikely to have much effect on consumer prices, but could intensify the slowdown in the economy that is already becoming apparent. The UK economy contracted in both March and April and the current trajectory of UK monetary policy is making a recession increasingly likely.

     

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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