The Bank of England’s ex-chief economist has cautioned policymakers about the risk of damaging the economy by maintaining high interest rates for an extended period.
Andy Haldane, who was chief economist for seven years until 2021, said the Bank’s ratesetting monetary policy committee risked further eroding its reputation if it delivered unnecessary damage to the economy by maintaining a restrictive policy stance for too long.
“I missed inflation on the way up, but it’s different to have crushed the economy on the way down,” .”That double blow to credibility is one if I were a central banker, in my old job, I would be looking to avoid.”
Haldane, 56, who is now chief executive of the Royal Society of Arts, said that the impetus for interest rate cuts was growing after the economy performed worse than expected last year. “For me, the case for putting in place some upfront, early insurance on the monetary policy side is strong and strengthening, and I’m fearful we leave that insurance a little too late in the year,” he said.
Figures released last week showed that the UK economy had contracted by 0.3 per cent in the final three months of 2023, meaning that the country had slipped into recession after two consecutive quarters of negative growth. GDP across 2023 expanded by only 0.1 per cent, worse than experts had expected and sluggish by historical standards.
Speculation suggests that the Bank may cut interest rates for the first time since March 2020 in May or June to help households and businesses.Its base rate stands at 5.25 per cent, a 16-year high.
Members of the Bank’s nine-strong MPC are concerned that inflation could stay above their 2 per cent target for longer if they loosen policy too soon. Inflation remained unchanged at 4 per cent last month, but is forecast to slip to 2 per cent in April before rising again.
The chancellor is expected to cut taxes in his budget on March 6, further stimulating demand and possibly prices, while services and core inflation, which the committee monitors closely to inform its rate decisions, remain high at 6.5 per cent and 5.1 per cent, respectively.
The MPC is being accused of causing inflation by increasing interest rates too slowly in the beginning of 2021.The Bank was the first big central bank to lift borrowing costs, in December 2021.
It is expected that Britain has already ended the recession in the first two months of this year. This would make it one of the shortest and least severe downturns in the past century.
January’s recovery in retail sales was the biggest in nearly three years
Separate data published by the Office for National Statistics last week showed that retail sales had risen by 3.4 per cent in January, the steepest rise since April 2021.
Analysts at Capital Economics, the consultancy, said: “We don’t think the Bank of England will be too worried about what is likely to be an extremely mild and short recession by historical standards. It still looks as though the UK economy will experience a soft landing in inflation and activity.”
The International Monetary Fund has forecast that the UK economy will expand by 0.6 per cent in 2024.