The BoE and other central bankers such as the US Federal Reserve lost their bearings after the financial crisis in 2009. They were called in to save the world and did it with gusto, slashing interest rates almost to zero and flooding economies with virtual cash via quantitative easing (QE).
Their new status as monetary superheroes must have gone to the heads, because ever since the BoE has committed one policy error after another.
Extreme monetary measures were only supposed to last a few months. Instead, the BoE and politicians allowed us all to become hooked on cheap money, feeding our addiction rather than breaking it.
By keeping interest rates ultra low for almost a dozen years, they destroyed our savings culture while inflating a housing bubble that is now set to burst.
When the pandemic struck, the BoE, Fed and European Central Bank doubled down on the easy money, flooding the global economy with yet more freshly minted cash.
That surge in the money supply fuelled today’s inflation, because at the same time the supply of goods slowed due to post-pandemic supply chain shortages.
Astonishingly, BoE governor Andrew Bailey and his rate-setting monetary policy committee (MPC) failed to spot the danger.
They succumbed to groupthink, filling the MPC with people who all felt the same, with the notable exception of chief economist Andy Haldane who thought independently and quit in 2021.
As a result, the MPC and snubbed so-called “monetarist” economists who were frantically warning that the money supply was out of control.
We’re all now paying the high price as the cost-of-living crisis continues to rage.
The Bank of England has made a string of other mistakes, as I have repeatedly highlighted.
Its predictions are dreadful.
The UK was supposed to spend this entire year in recession – five quarters in total – but so far we’ve escaped it altogether.
In November 2022, the BoE predicted unemployment would peak at 6.5 percent, only to revise that down to 4.5 percent.
Bailey’s biggest error was to declare in 2021 that inflation was going to be “transitory”, even though loads of economists were shrieking that it wasn’t.
He therefore took a leisurely approach in the early months of the inflation fight, then scrambled to play catch up by hiking base rates for 14 months in a row.
In doing so the BoE has triggered today’s mortgage crunch, as more than a million homeowners face paying an extra £500 a month when their fixed rates expire this year.
Many will lose their homes as a result.
There are real world consequences to disastrous policy-making in Threadneedle Street, where the BoE has its grand offices.
In recent months, I have warned of overkill as the BoE goes too far in its fight against inflation.
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Higher borrowing costs won’t do anything to resolve the two main factors driving inflation, the rising cost of energy and imported food.
Also, monetary policy takes up to 18 months to kick in, and the MPC needs to take a breather to see whether all those rate hikes are having an effect.
Bailey has finally acknowledged woken up. On Wednesday, he told MPs that rates may not rise much further from here as he expects inflation to fall “markedly” by the end of the year.
With base rates at 5.25 percent, we’re now “much nearer now to the top of the cycle”, which offers some hope to homeowners.
This doesn’t mean the rate hikes are over, though.
Economists still expect the MPC to raise interest rates for a 15th time in a row to 5.50 percent on September 21, then again to 5.75 percent in November.
Personally, I suspect this month’s hike could be the last. I still don’t fully trust Bailey to calm down and let inflation fade of its own accord, but the thought does seem to sailed through his mind.
Let’s hope he does do the right thing this time. It’ll have novelty value, if nothing else.
