Wishing the MPC a very merry Ratemas

Rate setters are facing perhaps their toughest challenge yet as the economic storm clouds gather, Edmund Greaves, head of editorial at MRM writes, as he looks at the last set of essential diary dates for 2024.

The rate path was going so well until it wasn’t. The Monetary Policy Committee (MPC) has sprung out of the inflation frying pan and into the stagflation fire.

On 19 December, just before Christmas, it will make its final rate decision of the year. It is potentially the most complicated decision yet. I could almost…almost…bring myself to feel sorry for Andrew Bailey and his gang at this juncture.

A generational inflation event which the MPC spent nigh on two years failing to get ahead of looked set, until recently, to finally have been quelled.

But the revenge of price hikes has sent shivers down the spine of the economy, just as the Budget and political pressures from across the Atlantic look set to create new, and much more intractable, problems.

Inflation two years ago was a straightforward enough story. We created too much cash during the pandemic. This was then turbocharged by an energy crisis that was broadly geopolitical in origins.

The one criticism of the Bank of England (although the issue of printing too much money in the pandemic has never really received the attention it deserves imho) was that it failed to get ahead of inflation until it spiked to around 11% before receding somewhat more gently.

Now as things stand, we’ve got a bit more inflation again because energy prices have ticked back up (among other things).

But the biggest threat to the economy is being driven by fiscal policy shift that is supposed to fix the problem of low/no growth.

Economists call this the ‘crowding out’ effect. When the Government hikes taxes and increases its borrowing to fuel spending, it dissuades private consumers, investors and businesses from their own spending or investing.

For households and businesses in practice this means cutting their costs. For businesses, this boils down to cutting both investment and jobs. Thus, the Government’s change of approach risks doing the exact opposite of its growth-generating intentions. And because Government spending replaces private spending, inflation doesn’t see demand pressures recede.

This situation is arguably a lot more potentially dangerous for the economy because it is much more complicated for rate setters to deal with, especially if the economy really does go off the deep end despite inflation staying above target (i.e. stagflation).

When all is said and done, the issue is that something must give in the economy eventually.

If rates, price hikes and economic growth don’t move in the right direction, the pressure release valve has to blow somewhere else. It is becoming harder to avoid the conclusion that it will be unemployment that will happen in the absence of something else.

Those of us with longer memories will remember what unemployment does politically (and why policymakers, both fiscal and monetary, are so scared of it). In short, people with no job, no money, and lots of time, have a tendency to get restless – quickly.

So Merry Ratemas to the MPC and good luck on your decision, you’re going to need it.

Dates for the month ahead

We’ll get a flurry of pre-Christmas data prints to contend with in December.

First up is GDP estimates on 13 December. This is followed by the ONS labour market overview on 13 December.

Inflation is on 18 December, and this is followed on a day later by the final MPC rate decision of 2024 on 19 December.

Finally, 20 December is the last guaranteed first-class mailing date. Get those cards in the post early!

Wishing everyone a merry Christmas from all of us here at MRM, Mouthy Money and Octo Members.