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The Bank of England is facing growing Tory pressure for interest rate cuts ahead of its May rate-setting meeting, prompting warnings from economists that politicians should not impinge on the central bank’s independence.
Chancellor Jeremy Hunt has repeatedly invoked the prospect of cuts as he seeks a feelgood factor in the economy ahead of the election expected this year.
But analysts have criticised his outspoken comments for blurring the lines between the Treasury and the independent BoE.
“This is dangerous territory for politicians to get into,” said Jagjit Chadha, director of the National Institute of Economic and Social Research, of Hunt’s comments on rate cuts.
“It is off limits for politicians to talk about what they expect or anticipate for interest rates and to take credit for [falling] inflation. They have handed the job to the Bank and should let them get on with it.”
The political pressure comes as the bank’s Monetary Policy Committee is grappling with internal divisions over how soon to lower rates from 5.25 per cent, with members Dave Ramsden and Huw Pill giving different assessments of the persistence of inflation earlier this month.
Faced with a stubborn opinion poll deficit the Conservatives are hoping for better economic conditions to underpin their bid for re-election.
But high interest rates pose a threat to the party’s hopes. The 1.5mn households who need to remortgage this year will see their payments rise by £1,800 annually on average, according to the Resolution Foundation think-tank.
In November Prime Minister Rishi Sunak triumphantly announced that his goal of halving inflation had been met.
During a visit to the US this month, Hunt told the FT that markets were expecting rate cuts in the midsummer or autumn, and that this pointed to a picture where “people are going to begin to feel the British economy has really turned a corner — particularly towards the end of the year.”
In December he told the FT that there was a “reasonable chance” that the BoE might reduce interest rates in 2024.
Some Tory lawmakers have explicitly called for rate reductions. “I think the Bank ought to have cut rates already,” said Sir Jacob Rees-Mogg, a former Tory cabinet minister. “It was slow in the way up and is repeating its error on the way down.”
Erik Britton, a former BoE official who is now chief executive of Fathom Consulting, an economic consultancy, said the chancellor’s comments could raise the public’s expectations of a rate cut. “The decision is not the chancellor’s decision, it is the BoE’s decision,” Britton said.
“It does feel like they are walking up to the line that demarcates operational independence of the BoE and having a really good look over that line — and maybe putting a foot over it to see what it feels like,” he added.
A Treasury spokesperson said Hunt’s comments “in no way” conflict with BoE independence and that he had been consistent in his support for the central bank.
“The Chancellor was simply reflecting on market expectations, as many previous chancellors have done under successive administrations, rather than advocating for a particular monetary policy choice or engaging in predictions.”
The MPC next sets rates on May 9. Ramsden, the BoE’s deputy governor, hinted this month that he did not need to see much more evidence of easing price growth to vote for a rate cut as he spoke of “downside risks” to the BoE’s February inflation forecast, which predicted consumer price inflation would fall temporarily before increasing later in the year.
But Pill, the bank’s chief economist, struck a very different tone on April 23, when he said he felt “relatively cautious” about starting rate cuts.
Neville Hill, an economist at Hybrid Economics, a consultancy, argued that the BoE is now “pretty comfortable” in its independence, which was granted by Labour in 1997, and that he did not expect it to be affected by political pressure.
He added that the chancellor’s comments on the prospect of rate cuts were in line with market forecasts, making them less controversial than if he had contradicted the direction of BoE policy.
The central bank has found itself in the political crosshairs repeatedly in recent years, not least as inflation that hit double-digit levels in 2022 provoked fury in Tory ranks.
Former prime minister Liz Truss has said she considered sacking BoE governor Andrew Bailey as part of her attempt to dismantle an “economic establishment” that she complains helped to bring her premiership down.
In April a group of Conservative lawmakers wrote to the chancellor complaining about the heavy cost of unwinding the BoE’s quantitative easing programme.
But the political turbulence surrounding the BoE pales in comparison with the challenges to the Federal Reserve in recent years from Donald Trump, however, who attacked the Fed both as presidential candidate in 2016 and as president.
In 2019, for instance, President Trump berated chair Jay Powell for his “horrendous lack of vision” as he demanded a massive rate cut.