The dilemma facing the Bank of England as it pushes interest rates up

The nightmare before Christmas for families,” is how the Lib Dems characterised the Bank of England’s latest interest rate rise, a reference to Tim Burton’s dark festive cinematic fable.

But if the decision of the Bank of England’s Monetary Policy Committee (MPC) to hike base rates by 0.5 percentage points, bringing them to a 14-year high of 3.5 per cent, is the latest episode in Britain’s current bad dream, it was hardly an unexpected one.

Most commentators and analysts were agreed that this was the likely outcome. The members of the MPC duly delivered. But there was a bit of a twist at the end of the story.

Six members of the committee voted in favour of the rise, with two against. They were Silvana Tenreyro, for a long time the MPC’s leading dove, favouring looser monetary policy, and Swati Dhingra, the most recent appointee. Both are external members.

Given the pair’s previous voting history, this was hardly a suprrise. It was Catherine Mann who provided the twist. The MPC’s hawk-in chief argued that the Bank should go faster, and harder, with a second consecutive 0.75-point rise.

This three-way split, between less, more and what the MPC ended up with, demonstrates the Bank’s dilemma. In raising rates, it’s squeezing an economy that might already be in recession, even if that is yet to be confirmed from a technical standpoint. Two consecutive quarters of decline are required for that box to be properly ticked.

Which should the Bank prioritise? The economy and, not to put too fine a point on it, people’s jobs? Or those brutal price rises, which have left some people in desperate straits?

With its public statements, the MPC wants us to believe all its guns are trained on inflation and bringing it back to the Bank’s 2 per cent target. Its actions tell a slightly different story. That aim has to be balanced with the economic damage that comes through rates going up.

The MPC hasn’t attacked rates with the same aggression as some of its other central bank peers. Of course, it is working with a notably weaker economy than they are. The worst in the OECD bar Russia, according to forecasts.

However, the economy has actually performed a little better than had been feared lately. The GDP figures haven’t been as grim as some had forecast. The labour market has loosened a little, with the number of vacancies falling slightly, while the supply of workers has improved a bit. Older would-be workers, previously classed as “economically inactive”, have started to tip-toe their way back into the labour market. But despite the (very) difficult place that UK plc is in, the impact on jobs has so far been quite mild.

I know, I know – unemployment is a lagging indicator. But the bad news is still coming more slowly than might be expected. Perhaps the latest rate rise will speed it up (something clearly weighing on the minds of Tenreyro and Dhingra).

Central bankers are well remunerated by public sector standards. But that doesn’t make their lot a happy one, and the slings and arrows are inevitably starting to land in their direction. Business groups are keen on getting inflation under control. But their members are starting to chafe under the pressure of ever-higher rates.

This, remember, is the ninth consecutive rise. The sequence began in December of last year when base rates stood at a historic low of 0.1 per cent. The increases started off slowly before accelerating, with November’s 0.75-point rise the sharpest increase imposed by the MPC in years.

It has guided market expectations of the interest rate peak down: the consensus is now at about 4.25 per cent, though there are still some who think rates will go a little higher.

Presumably, the Bank is now comfortable with that level because there was no more of that in the latest missive. But inflation is still running hot and it is too early to say whether November’s surprising fall is a sign that the worst really is over and October’s foul 11.1 per cent was the peak.

We’ve had the usual promises from the MPC to take tough action so inflation figures stay where they are. And we shouldn’t forget about the people who can’t afford to feed themselves and their families. Catherine Mann certainly didn’t.

But with the exception of savers, this interest rate medicine is still bitter indeed. There won’t be a happier story, some sugar to help the medicine go down, until the middle of next year at least.