ALEX BRUMMER: Bank should have stopped further rate hikes


ALEX BRUMMER: Bank of England should have blocked further rate hikes… or even cut them off



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Central banks around the world were off beat as they recognized that the inflationary genie was out of the bottle in 2021.

They repeat the mistake. All – including the ECB, the US Federal Reserve, the Swiss National Bank (SNB) and the Bank of England – recognize that the turmoil in the banking sector has effectively meant that credit conditions, loan availability and liquidity have tightened.

The impact is therefore comparable to that of an interest rate hike that limits growth prospects. Tighter borrowing conditions are likely to have a more direct impact on inflation than monetary policy, which takes time to work.

Yet global groupthink seems to have gripped decision-makers, with the Bank of England following the Fed, ECB and SNB in ​​raising rates.

Schoolboy mistake: The Bank of England has raised its base rate by a quarter of a percentage point to 4.25%

Schoolboy mistake: The Bank of England has raised its base rate by a quarter of a percentage point to 4.25%

The reaction to the bankruptcy of Silicon Valley Bank, the collapse of Credit Suisse, tightening credit conditions and sharp declines in the equity value of bank stocks (weakening capital buffers) was the reverse of reactions to other global events.

At the onset of Covid, there was a rush to cut interest rates, expand money printing and arrange global currency swaps to stabilize nervous markets.

During the liability-driven investment crisis in the UK, the Bank immediately launched a lifeboat to avoid a doomsday circle of insolvencies.

Faced with uncertainty this time, it raised bank rates by a quarter of a percentage point to 4.25 percent.

You don’t have to be a former Monetary Policy Committee dissident Danny Blanchflower to recognize that this is a mistake. It’s economics 101 (an undergraduate education lesson) that you don’t go all out for Herbert Hoover and tighten policy into turbulence.

In any case, Fed Chairman Jay Powell acknowledged that the ongoing banking crisis was a factor in the Fed’s decision to raise the key federal funds rate by just a quarter of a point and withhold forward guidance.

There is still much we don’t know about the health of US regional banks. In addition, the noise around the First Republic bank in San Francisco may have eased, but the problems have not yet been resolved.

At the ECB, Christine Lagarde was too enthusiastic in her embrace of a half percentage point increase, albeit from a lower starting point.

The Eurozone has never resolved the underlying sovereign debt crisis or come to grips with the fact that some Italian and Greek banks are still backed by the central bank.

Here in Britain, the tone of the Bank of England minutes is fascinating. The nine-member monetary policy committee was in a difficult position because of the surprise in February when consumer price inflation emerged.

Even though the 10.4 percent annual increase was erratic, the Bank, which had been on the heels of the cost of living for so long, couldn’t afford to ignore it.

Still, there was enough material in the minutes to provide a counter image.

For much of the past week there have been statements from Threadneedle Street that UK banks have robust capital (including the challenger borrowers?) and that the system is resilient.

This is a bit like the football club praising the coach before he gets fired.

But the reality in money markets is that ‘wholesale money costs have risen’ as a result of the tensions, so there was some tightening before the latest quarter-point increase.

A two-member minority in the MPC – outside members Silvana Tenreyro and Swati Dhingra – wanted a pause as the energy price shock subsided and the full effects of monetary tightening became visible.

It was argued that policies had become increasingly restrictive and interest rate hikes should be reversed.

The spiral of inflation around the world has challenged the seeming infallibility of central bankers and made targeting nonsense. UK prices are still rising by five times HM Treasury’s target.

Bank of England Governor Andrew Bailey and his fellow central bankers have clearly felt there is no choice but to tighten monetary conditions to restore institutional credibility.

The Old Lady was concerned enough about the banking events of the past month to ask for a special assessment of the recent turmoil ahead of its meeting in May. It would be prudent to pause or even lower rates now prior to the investigation.


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