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The Bank of England is under increasing pressure from the Conservative Party to cut interest rates ahead of its interest rate meeting in May, with economists warning politicians should not undermine the central bank’s independence.
Treasurer Jeremy Hunt has repeatedly mentioned the possibility of cuts, seeking a boost for the economy ahead of elections expected this year.
But analysts have criticized his outspoken comments for blurring the lines between the Treasury and the independent BoE.
Jagjit Chadha, director of the National Institute of Economic and Social Research, said of Hunt’s comments on interest rate cuts: “This is dangerous territory for politicians to enter.”
“Politicians are prohibited from discussing or taking credit for interest rate forecasts or predictions.” [falling] inflation. They handed the job over to the bank, so they should let it continue. ”
The political pressure comes as the central bank’s Monetary Policy Committee faces internal disagreements over how quickly to lower interest rates from 5.25%, with members Dave Ramsden and Hugh Pill Earlier this month, he offered a different assessment of the sustainability of inflation.
Facing a stubborn poll deficit, the Conservative Party is hoping for improved economic conditions to win re-election.
However, high interest rates threaten the party’s hopes. The 1.5 million households who need to refinance their mortgages this year will see their payments rise by an average of £1,800 a year, according to the Resolution Foundation think tank.
In November, Chancellor Rishi Sunak triumphantly announced that the goal of halving inflation had been achieved.
Mr Hunt, who visited the US this month, told the FT that markets were expecting a rate cut in midsummer or autumn, indicating that “people will start to feel that the UK economy has really turned the corner”. Told. Especially towards the end of the year. ”
He told the FT in December that there was a “good chance” the BoE would cut interest rates in 2024.
Some Conservative MPs have explicitly called for rate cuts. “I think the central bank should have cut interest rates already,” said Sir Jacob Rees-Mogg, a former Conservative cabinet minister. “He was slow on the way up, but he kept making errors on the way down.”
Eric Britton, a former BoE official and now chief executive of economic consultancy Fathom Consulting, said the chancellor’s comments could raise public expectations for a rate cut. “This decision is not the Prime Minister’s, it is the BoE’s,” Mr Britton said.
He added: “It feels like they’re stepping up to the line that defines central bank operational independence and taking a good look at that line. “We may be stepping over the line,” he added.
A Treasury spokesperson said Mr Hunt’s comments were “in no way” inconsistent with the central bank’s independence and that he had consistently expressed support for the central bank.
“Rather than advocating specific monetary policy choices or engaging in forecasting, the chancellor is simply reflecting market expectations, as many previous prime ministers have done under successive governments. .”
MPC will next decide on interest rates on May 9th. Earlier this month, the central bank’s deputy governor Ramsden spoke of “downside risks” to the central bank, suggesting he didn’t need to see any more evidence of easing inflation to vote in favor of rate cuts. The February inflation forecast predicted that consumer price inflation would decline temporarily and then rise in the second half of the year.
But Pill, the bank’s chief economist, struck a very different tone on April 23, saying he felt “relatively cautious” about starting to cut rates.
Neville Hill, an economist at consultancy Hybrid Economics, said the BoE is currently “quite comfortable” with the independence granted by Labor in 1997 and does not expect it to be affected by political pressure. he claimed.
He added that the chancellor’s comments on the prospect of rate cuts were in line with market expectations and were less likely to be controversial than if they contradicted the central bank’s policy direction.
The central bank has been repeatedly targeted politically in recent years, particularly as inflation reached double-digit levels in 2022, infuriating Conservative Party members.
Former prime minister Liz Truss said she considered sacking Andrew Bailey, the governor of the Bank of England, as part of an attempt to dismantle the “economic system” that she says contributed to her downfall.
In April, a group of Conservative MPs wrote to the Prime Minister complaining that lifting the BoE’s quantitative easing program would be costly.
But the political turmoil surrounding the central bank pales in comparison to the recent challenge to the central bank by Donald Trump, who attacked the central bank both as a presidential candidate and as president in 2016.
In 2019, for example, President Trump criticized Chairman Jay Powell’s “appalling lack of vision” for calling for massive rate cuts.
