It has been clear for some time that the pre-referendum warnings made by Bank of England governor Mark Carney were wide of the mark. Last May, he said that a vote for Brexit would pose an ‘immediate and significant threat’ to the UK economy, increasing unemployment, hitting growth, possibly to the point of recession.
Today, however, the bank effectively admits that it was still being far too gloomy about the economy even last November. It upgraded its forecast for economic growth in 2017 from 1.4 per cent (as announced in the Autumn statement) to two per cent – saying that consumer spending has been stronger than expected and that the global economy as a whole has been performing better.
The wonder is now why on Earth the Bank of England kept interest rates at 0.25 per cent? The Monetary Policy Committee reduced them to that level, from 0.5 per cent, last August when it still believed that economic data indicated a post-Brexit vote slump. Now what it regarded as an emergency has passed, why are rates still at a record low? The Bank of England is tasked with tracking inflation. It is supposed to keep the Consumer Prices Index around 2 per cent. Normally, the Bank’s forecasts magically predict CPI to be at precisely 2 per cent in two years’ time. Yet today’s inflation forecast puts CPI at 2.4 per cent in three years’ time (up from 1.6 per cent now). So why hasn’t last August’s interest rate cut been reversed?
It is hard to escape the conclusion that the Bank simply isn’t brave enough to jack up interest rates. Not only would a rise now be an admission that the Bank was wrong in its gloomy post-Brexit forecast, it would be an unprecedented move for the nine members of the MPC, none of whom have ever raised rates. The longest-serving member, Ian McCafferty, has been on it since September 2012. Yet the MPC has not raised rates for nearly a decade. The 10th anniversary of the last rise will fall on 5 July – a date I am sure that a group of long-suffering savers is already planning to celebrate ironically by cutting a cake in Threadneedle Street.
There is a narrative among the rearguard Remain campaign that Britain is facing an era of nightmare inflation as a result of Brexit. That seems far-fetched. But it seems we may well face a couple of years of CPI above the government’s target – not so much a result of Brexit but of a failure of the Bank of England to raise interest rates to a level appropriate for economic conditions.