Bank of England's latest interest rate cut won't make any difference - here's why: John Woods
In November the Bank of England’s Monetary Policy Committee held UK Base Rate at 4 per cent. Four of its members had voted for a quarter percentage point reduction to 3.75 per cent, and four to stick to 4 per cent, so it had to be decided by a casting vote by the Governor.
The MPC’s remit is to keep inflation at 2 per cent which it has only achieved once in the last five years. In fact, on average, inflation rates have been at least double that 2% target which has resulted in investors, from global investors to private pensioners, getting a negative return on their money.
What is interesting is that the committee members appear to treat the conduct of each meeting as a separate individual decision, without, seemingly, relating it to past meetings and decisions. Next meeting they’ll do the whole thing all over again. They won’t analyse why what they did at the last meeting or the meeting before worked or didn’t work.
They certainly won’t consider whether the current situation is like previous historic cycles and take lessons from it. Indeed, as far as I can see they don’t even accept that there are such things as cycles. They treat each rate setting meeting as an academic exercise based not on their personal professional experience and knowledge but on increasingly doubtful public data.
They seem to be made up of a mixture of UK Civil Servants, Regulators and Academic Economists. None of them appear to have much practical economic, banking or business experience: They do not seem to have any previous experience of rate setting.
Some are foreign nationals who seem to have mainly lived and worked elsewhere. Does anyone who does live and work here really believe that actual price inflation is only 3.6 per cent? What shops and petrol stations do they go to? Does anyone really believe that the price of virtual reality headsets and yoga mats (both added in 2025) are relevant to any particular inflation index?
Rate setting seems to have become a plaything for academic economics teachers. Rate setting should be a practical technical exercise. Cycles do happen. Where we are now is remarkably like the early 1970s but for Secondary Lenders read Indirect Lending or Shadow Banking.
As someone who has been following cycles for 50 years my diagnosis this time is that we are already well into recession (using the straightforward not academic meaning of that word) and nothing anyone does now will stop it.
Reducing base rate by a quarter percentage point won’t make any difference. If a company needs a quarter percentage point reduction to its borrowing costs to survive it does not deserve to survive. The World and UK economies are in decline. UK Property sales are already slowing, asking prices are dropping. Inflation will increase.
Businesses are passing on all the costs they can but that will become increasingly difficult. Businesses are already tightening up on future investment and expansion. At the end of it they are just hoping for the best. Nothing that anyone has done over the last 5 years has done anything to reverse or correct this. The underlying cause of all booms (which is what we’ve just had) is low interest rates. These can be controlled by putting up rates before things get out of hand. Denis Healy did that in the 1970s.
Instead, we reduced rates to near zero and kept them there for 15 odd years. When we finally woke up to the problem we’d created it was too late and we are left with companies who can’t now afford their borrowings, homeowners (particularly in London) who are lumbered with property they can’t sell and paid too much for and mortgages they can’t afford to repay. There is nothing they can do. To complain interest rates are too high and should be lowered is not going to work. Interest rates are roughly where they should be.
If the MPC had done what it should, acting quicker and more robustly to combat inflation, this could have been managed. It is now too late to pretend that they are doing something by reducing rates by a quarter percentage point. What we need is more study of UK economic history and less academic theory. Writing it in Plain English would also help. My guess is that this one is going to be very nasty. The only hope is that America gets it so much worse than us that ours will just be treated as a side show.
John Woods is Moneyfacts Group Chairman. This article originally appeared in the INTEREST journal from Moneyfacts.