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The Bank of England is facing growing pressure from Conservatives to cut rates ahead of its interest rate meeting in May, prompting economists to warn that politicians should not compromise the central bank’s independence.
Chancellor Jeremy Hunt has repeatedly threatened cuts as he seeks a feel-good economy ahead of elections expected this year.
But analysts have criticized his candid comments for blurring the lines between the Treasury and the independent BoE.
“This is dangerous territory for politicians,” Jagjit Chadha, director of the National Institute of Economic and Social Research, said of Hunt’s comments on rate cuts.
“It is taboo for politicians to talk about what they want or expect from interest rates and what they are borrowing for [falling] Inflation. They handed the job over to the bank and should let them get on with it.”
The political pressure comes as the bank’s monetary policy committee grapples with internal disagreements over when interest rates will soon be cut from 5.25 percent, with members Dave Ramsden and Huw Pill giving different assessments on the persistence of inflation earlier this month .
Facing a stubborn opinion poll deficit, the Conservatives are hoping for better economic conditions to support their re-election.
But high interest rates are endangering the party’s hopes. The 1.5 million households due to remortgage this year will see their payments rise by an average of £1,800 a year, according to think tank Resolution Foundation.
In November, Prime Minister Rishi Sunak triumphantly announced that his goal of halving inflation had been achieved.
During a visit to the US this month, Hunt told the FT that markets expect interest rate cuts in mid-summer or autumn and that this points to a picture in which “people will start to feel that the UK economy is really “We managed to turn things around – especially towards the end of the year.”
In December he told the FT there was a “reasonable chance” the BoE could cut interest rates in 2024.
Some Conservative MPs have specifically called for tax cuts. “I think the bank should have cut rates already,” said Sir Jacob Rees-Mogg, a former Tory cabinet minister. “On the way up it was slow and on the way down it repeats its mistake.”
Erik Britton, a former BoE official and now chief executive of Fathom Consulting, an economic consultancy, said the chancellor’s comments could increase public expectations of a rate cut. “The decision is not the chancellor’s decision, it’s the BoE’s decision,” Britton said.
“It feels like they are approaching the boundary that demarcates the BoE’s operational independence and are keeping a close eye on that boundary – and maybe putting a foot over it to see what it feels like,” he added .
A Treasury spokesman said Hunt’s comments were “in no way” inconsistent with the BoE’s independence and that he had consistently supported the central bank.
“The chancellor was simply reflecting on market expectations, as many previous chancellors have done under successive governments, rather than committing to any particular monetary policy decision or making any forecasts.”
The MPC will next set rates on May 9th. Ramsden, the BoE’s deputy governor, suggested this month that he did not need to see further signs of slowing price growth to vote for a rate cut, as he spoke of “downside risks” to the BoE’s February inflation forecast, which suggested a temporary decline consumer price inflation predicted before rising again later in the year.
But Pill, the bank’s chief economist, struck a very different tone on April 23 when he said he was “relatively cautious” about starting rate cuts.
Neville Hill, an economist at Hybrid Economics, a consultancy, argued that the BoE is now “quite comfortable” with its independence, granted to Labor in 1997, and that he does not expect it to be affected by political pressure.
He added that the Chancellor’s comments on the prospects of rate cuts were in line with market forecasts and were therefore less controversial than if he had contradicted the direction of BoE policy.
The central bank has repeatedly found itself in the political crosshairs in recent years, not least when inflation, which reached double digits in 2022, caused turmoil in the Tory ranks.
Former prime minister Liz Truss said she was considering sacking BoE governor Andrew Bailey as part of her attempt to break up an “economic establishment” which she said helped bring down her premiership.
In April, a group of Conservative MPs wrote to the Chancellor complaining about the high costs associated with unwinding the Bank of England’s quantitative easing program.
But the political turmoil surrounding the BoE pales in comparison to the challenges leveled at the Federal Reserve in recent years by Donald Trump, who has attacked the Fed both as a presidential candidate in 2016 and as president.
In 2019, for example, President Trump lambasted Chairman Jay Powell for his “terrible lack of vision” as he called for a massive interest rate cut.