Danny Blanchflower is a former member of the Bank of England’s Monetary Policy Committee and a longtime professor of economics at Dartmouth College. As U.K. inflation gets down to 2.2% and the economy slows, he is pounding the table for the BOE to get off the dime and starting cutting rates, and not wait for more evidence that prices are not going to start surging higher again. This echoes what he did back in 2007 when as a BOE external member he started pushing the majority of MPC members to start cutting rates as he saw a financial crisis coming long before others did.
The Bank of England kept its main interest rate unchanged at 5% Thursday. Danny says the BOE “is fiddling while Rome burns,” in sharp contrast to the Federal Reserve which decided at this week’s meeting to kick off its rate cut cycle with an aggressive 50 bps move.
Watching the central bank parade of monetary policy meetings this week is “pretty interesting, actually, where you see the fed acting and the Bank of England doing nothing. And on an 8 to one vote,” he adds, referring to the BOE vote that was seen as hawkish as a near majority decided to wait and see on the expected 25bps rate cut.
The BOE did exactly what is was expected to do as it followed up its first rate cut in four years at its August meeting by holding it steady now in September at 5%. This as BOE governor Andrew Bailey in remarks at the Fed’s recent Jackson Hole symposium signaled caution on rate cuts and the need to make sure the recent decline in inflation will be lasting. The BOE followed this up today stating that they “need to be careful not to cut rates too fast or by too much.”
Danny says the real justification for the BOE not cutting its key rate and waiting to do it at the November meeting has more to with waiting to see how much austerity is woven into the government’s budget soon to be released plan than it does with inflation. The new U.K. Chancellor said it will involve "difficult decisions" on tax, spending and welfare.
The BOE is “waiting to see how much austerity the new Chancellor brings in October and I think that might be the justification, because every indication is round two of austerity is round two coming again with cuts and if that’s the case then I think that just means the November meeting is full on for a big - for a big cut.
Danny say this is especially true after Fed opted for an aggressive 50bps rate cut this week.
“What happens in the United States is really important to everybody else. The fact (i)s that the fed rate cut strongly made it more likely that the Bank of England would have to (do this too). For the BOE this is a holding pattern, and it didn't delay the inevitable.” he adds. “I think the market …is it's pricing in a quarter point cut in November. I think this (BOE) dilly dallying (by the BOE) raised the prospect that actually what should be on the table is a 50 basis point cut.”
We covered a lot more ground. Like the good professor of economics that he is, Danny too time to explain how monetary and fiscal policy interact in their own U.K. way. He also went over the facts, forces and figures that show where the economy is now, where it’s heading and why. Danny is a great story teller who can make economics, budgets and central banking come to life. Sit back and let him educate and entertain you.
Blanchflower: BOE Should Have Cut Key Rate Today with Inflation at 2.2%