UK recession unhelpful for who as interest rates in focus?

Messrs Bailey and Broadbent appeared at pains to portray the UK having fallen into recession as no particularly big deal, as they signalled they were in no particular hurry to vote to cut rates.

The setting of UK interest rates by the Bank of England’s Monetary Policy Committee has become somewhat controversial in recent times, after a long period when it was distinctly uncontentious.

The MPC has raised UK base rates from a record low of 0.1% in December 2021 to 5.25%.

And, at the committee’s latest meeting ending on January 31, there was a three-way split on what should happen with base rates.

External MPC member Swati Dhingra voted to cut UK base rates by a quarter-point to 5%.

Fellow external MPC members Jonathan Haskel and Catherine L Mann preferred to increase base rates by a quarter-point to 5.5%.

And the remaining six-strong camp, which prevailed with its no-change call, included Messrs Bailey and Broadbent.

There were at least a few points of note when it came to the latest vote on rates.

External MPC member Megan Greene, who had voted unsuccessfully with Mr Haskel and Ms Mann for a quarter-point rise in base rates at the MPC’s previous meeting ending on December 13 last year, opted for no change in the latest vote.

And Ms Dhingra switched to her vote to cut rates at the latest meeting from a no-change stance in December.

There was also an interesting change in language from the Bank of England in its monetary policy summary, published on February 1 in the wake of the meeting ending on January 31.

The Bank said: “The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. On that basis, the committee will keep under review for how long Bank Rate should be maintained at its current level.”

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In its monetary policy summary published on December 14, the Bank had declared: “The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the committee’s remit.

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“As illustrated by the November monetary policy report projections, the committee continues to judge that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

There is a big change in tone between the two statements, with the “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures” talk having been dropped in the most recent one.

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And the “monetary policy will need to be sufficiently restrictive for sufficiently long” declaration has also been abandoned.

The focus has, not surprisingly, moved over recent months from the direction of the next move in rates to the timing of the first cut.

While Prime Minister Rishi Sunak and Chancellor Jeremy Hunt have appeared quite content to let the UK economy fall into recession against a backdrop of much tighter monetary policy, as they have banged the drum about bringing inflation under control, others have been unhappy about the MPC’s calls on interest rates.

As an aside, the ruling Conservatives’ attempts to claim credit for bringing inflation down from a 41-year high of 11.1% in October 2022 (to 4% at last count) have been laughable. After all, the Tories are not responsible for monetary policy other than in setting the Bank of England’s 2% target for annual UK consumer prices index inflation, which has been unchanged since long before the Conservatives came to power in 2010. What is more, the Tories fuelled the UK’s inflation crisis with their hard Brexit and failure to keep a lid on household electricity and gas bills.

Former MPC member Danny Blanchflower has been among those to criticise the MPC’s decisions on interest rates.

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The eminent economist told an event last June hosted by Glasgow Chamber of Commerce that there was a very considerable probability on the basis of the Bank of England’s own forecasts out to 2026 that there would be deflation.

Mr Blanchflower, who is Bruce V. Rauner ’78 professor of economics at Dartmouth College in the US and a visiting professor at the University of Glasgow, asked: “How can you raise rates with a forecast that says you should be cutting rates? They are out of their minds.”

Base rates were at 4.5% at that point.

Official data last week revealed the UK economy had fallen into recession with a 0.3% quarter-on-quarter drop in gross domestic product in the final three months of last year. This followed a 0.1% decline in the three months to September. Recession is defined in the UK as two consecutive quarters of declining output.

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While many people might not notice that much of a difference between recession and the protracted stagnation we have seen under the Tories, there is surely a danger of downplaying excessively the fact the UK has dropped into recession.

Therefore, this week’s comments from Messrs Bailey and Broadbent could be seen as worrying.

Mr Bailey told MPs that, by historical standards, the latest recession “is the weakest by a long way”.

That might well be true on the numbers but it is recession nonetheless. And the UK economy grew by just 0.1% over 2023, a very weak performance indeed.

Mr Broadbent said the definition of a UK recession was “unhelpful, frankly”, pointing out that other countries such as the US calculate it differently.

The UK economy meeting the definition of a recession certainly seems unhelpful for the Conservatives, with a general election on the horizon. It might also be viewed by some as unhelpful for the Bank of England and the MPC, given the debate over whether the interest-rate medicine has been overdone.