The Bank of England risks worsening Britain’s recession unless it cuts interest rates soon to ease pressure on household budgets amid the cost of living crisis, the bank’s former chief economist has warned.
Andy Haldane, who led the rate hikes until he left the central bank in 2021, said the central bank risked “destroying the economy” by keeping borrowing costs at a 16-year high.
Britain’s economy slipped into recession late last year as high interest rates and soaring costs of living forced distressed consumers to cut back on spending, official figures released on Thursday showed.
Britain’s gross domestic product (GDP) fell by a stronger-than-expected 0.3% in the three months to December, as all major economic sectors fell and retail sales plummeted ahead of Christmas. This followed a 0.1% decline in the third quarter. Economists consider two consecutive quarters of GDP decline to be the definition of a recession.
“The balance of risk is there, yes,” Haldane told Bloomberg’s UK Politics Podcast when asked if there was a risk of worsening the recession unless the central bank cuts interest rates soon.
“For me, putting early insurance in place on the monetary policy front is strong and reinforcing, and I’m concerned that it’s a little too late to give up that insurance this year.”
Financial markets expect the central bank to begin cutting interest rates from the current 5.25% level this summer, with the first reduction in borrowing costs occurring as early as June. Investors are pricing in a 17% chance of a May rate cut, and a nearly 50% chance of a June rate cut.
This comes after inflation remained stable at 4% in January, contrary to expectations for a modest rise, after the first monthly fall in food prices in two years offset rising energy costs. It is something. The inflation rate reached 11.1% in October 2022, the highest level in 41 years.
However, World Bank policymakers have warned that the UK faces continued inflation risks from a tight job market and rising prices in the service sector of the economy. Central Bank Governor Andrew Bailey and three other members of the rate-setting Monetary Policy Committee are due to give evidence to the Commons Treasury Committee on Tuesday.
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Threadneedle Street had come under fire for delaying the start of the rate hike cycle until December 2021, when borrowing costs were set at a record low of 0.1%. Mr. Haldane was one of the commentators at the time who warned that interest rates would need to rise to deal with soaring inflation.
But the former World Bank chief economist and current chief executive of the Royal Society of Arts think tank suggested he would do it. Supports interest rate cuts from the end of last year As inflationary pressures subside and economic activity comes under pressure from rising borrowing costs.
“It’s one thing to actually miss out on inflation on the way up, it’s quite another thing to then crush the economy on the way down,” Haldane said. “That double blow to credibility is something I would want to avoid if I were a central banker in my old job.”
