The politicisation of rates is here
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With the Bank of England now set to cut rates ahead of the US Fed, Edmund Greaves, head of editorial at MRM, considers the politicisation of interest rates and its potential effects. Plus, he looks at the key dates for the month ahead in May.
The Bank of England is set to announce its latest rate decision on 9 May. The cut might not be imminent, but pressure is building.
Central bank independence is a fact of life. At least, it has been since 1998 when Messrs Blair and Brown gave the Bank of England its independence.
The noble thought in this pursuit was that rate setting was a powerful political tool which politicians could use willy nilly to exacerbate economic conditions that were favourable to whoever was in charge.
But this independence has had consequences. Chiefly, it is that rates had been historically low for many years – even before the onset of the 2008 financial crisis (arguably low rates helped cause it).
This didn’t lead to much of a reputation problem in the decade after the crisis, as low rates meant cheap debt. Asset prices zoomed up, debt was cheap, and the world was fine (sort of).
But the inflation shock of the past three years has woken everyone up from this fever dream, and now the independence of rate setters, as a rule, is quietly being questioned.
Take this piece from the FT at the weekend. That Tory politicians are even calling for lower rates, so as to promote a feelgood factor ahead of a dire general election (for them), is risible.
These politicians are in effect saying, let’s lower rates and risk inflation catching fire again in a very real way, just so we can score some votes.
Meanwhile in the US, even stranger (and more overt) plans are afoot. Donald Trump, allegedly, is considering taking control of rates personally were he to win the presidential election – financial bubbles be damned.
These are just two examples but take it from me, with actual interest rates now back in play, we have to face the fact that they are now a political football to be kicked around until the ball bursts.
No one seems to be discussing the idea that maybe rates should actually remain higher, especially seeing as the economy currently seems to be tolerating them.
I recommend to readers this book by Edward Chancellor. It lays out in black and white just why the low rates of the 2010s were so destructive, to our financial, economic, political and social systems.
The next time you see someone call for lower rates, ask will it actually help? Or just anaesthetise problems that should be confronted instead? The politicisation of rates are here and soon we’re going to have to start considering what side of the debate we’re on.
Month ahead for May
May can start to feel like the winddown for Summer has begun; the days are longer, the sun is (hopefully) out, and we have not one but two bank holidays.
But the market and economy trudge on regardless.
We’ve got the first quarterly estimate of UK GDP for Q1 2024 from the Office for National Statistics (ONS) on 10 May.
ONS UK monthly unemployment and wages figures fall on 14 May while UK monthly inflation figures are published on 22 May.
Finally, on 31 May, the FCA’s new anti-greenwashing rule comes into effect.
Here’s wishing you a sun-filled couple of bank holidays from all of us here at MRM and Mouthy Money.