A former governor of the Bank of England, Lord Mervyn King, has stated that while the Bank was initially slow to reduce stimulus measures after the COVID pandemic, its efforts to control inflation are now “in the right area.” Lord King, who oversaw the Bank’s response to the 2008 financial crisis, made these remarks ahead of the upcoming interest rate decision.
Current market expectations anticipate a 15th consecutive interest rate increase of 0.25 percentage points, which would bring the rate to 5.5%, a level not seen since 2007. Lord King refrained from passing judgment on this decision, as he lacks access to the same data as the rate-setting committee. However, he indicated that such an increase would not be overly punitive, given the significant upward shift in rates since December 2021.
Lord King expressed, “I don’t think it matters a great deal. We’re in the right ballpark now.” Nevertheless, any increase would impose further financial strain on borrowers, particularly households on mortgage deals linked to the Bank’s interest rate. This would exacerbate the ongoing cost of living challenges.
Although the cost of new fixed-rate deals has slightly decreased in recent weeks, it remains higher than the levels seen in 2008, aligning with projections of a lower peak in the Bank rate than initially anticipated. Nonetheless, the average two-year fixed residential mortgage rate still stands at 6.66%, as reported by the Moneyfacts website. Similarly, the average five-year deal remains above 6%.
The Bank’s monetary policy committee (MPC) is widely expected to pause after the anticipated rate hike this week, consistent with Governor Andrew Bailey’s earlier statements about the proximity of the peak rate. Another increase could be deemed justifiable by the rate-setters due to the continued rapid rise in wages.
The Bank faces a delicate balancing act in addressing inflationary pressures by moderating demand, while simultaneously preventing a slide towards recession and the consequent loss of jobs. Criticism has been directed at the Bank for its handling of inflation, with accusations of being slow to taper COVID-era stimulus measures as economic activity resumed after lockdowns. The record-low Bank rate of 0.1% remained unchanged until December 2021.
Lord King noted that not only the Bank of England but also other major central banks were at fault for not raising rates promptly. The Bank’s former chief economist, Andy Haldane, echoed this sentiment in an interview with Sky News, asserting that the MPC contributed to inflationary pressures during that period.
In May, Mr. Bailey conceded that there were “very significant lessons to be learned” for monetary policy in a world of substantial shocks. The MPC has grappled with a range of challenges, from COVID-related lockdowns to the repercussions of Russia’s conflict in Ukraine, all within a span of two years. The Bank has announced a review of its staff forecasting model, led by former US Federal Reserve chair Ben Bernanke.