MAGGIE PAGANO: Bank of England should be wary of more rate rises

A few months ago Silvana Tenreyro, a professor at the London School of Economics who sits on the Bank of England’s Monetary Policy Committee (MPC), gave a bombshell speech in the US which went unnoticed here in the UK.

The British-Argentine economist remarked that it was the Bank’s job to set interest rates based on what will happen in the future – and not what is happening right now.

It’s the most insightful point, and one that goes to the heart of the deepening division over the future direction of interest rates.

Tenreyro, who has been one of the most dovish of MPC members since joining six years ago, went on to warn that interest rates are already higher than the economy can bear, and inflation will fall below the Bank’s 2 per cent target as a consequence.

The future is already here. The recent rate rises are indeed having their effect, as we are seeing with gilt yields and interest rate futures soaring.

On point: LSE professor Silvana Tenreyro (pictured) who sits on the Bank of England’s MPC committee, gave a bombshell speech in the US

Higher rates are doing their job. Mortgages are shooting up, offers are being withdrawn and house prices are falling.

It’s not so much a squeeze you can feel in the economy but the screeching of brakes being pulled on in households as consumers rein in their spending.

If mortgage rates were to reach 6 per cent, as some predict, analysts reckon the repayments would be as punitive for homeowners as 13 per cent was in the late 1980s, leading to negative equity for many.

Which is why – as we have argued before – the Bank should pause and wait to assess the impact the 12 rate rises so far are having on consumer spending and demand and, indeed, on future wage demands.

If it rushes ahead with another hike on Thursday, it would be acting not only rashly but dangerously, potentially tipping the country into recession.

The danger now, said Tenreyro, is that those who want to raise rates become Milton Friedman’s ‘fool in the shower’ who scalds himself by being too impatient. 

As the great Chicago economist said: ‘When the fool starts the water and it runs cold, he keeps turning the faucet and, eventually, because he’s impatient, gets burned.’

It’s equally bizarre that the Bank does not appear to be taking much notice of the sharp fall in money supply taking place.

This is surely a positive sign after years of bloating the economy with quantitative easing, first after the financial crash and then during lockdown to finance the furlough scheme.

House, commodity and energy prices are on their way down. As Friedman also said: ‘Inflation is always and everywhere a monetary phenomenon.’

Nothing much has changed.

It’s another reason why the constant meddling from Chancellor, Jeremy Hunt, with his non-stop commentary that the Bank should do what it takes to ‘squeeze inflation out of the system’ is so damaging.

Politicians are meant to stay out of monetary policy. It’s almost as though he is willing the Bank to overdose, tipping the country into recession.

It’s a pity that next week’s MPC meeting is Tenreyro’s last. We need her wise words.

The hawks would do well to listen to her more carefully this time if they want to prevent the country from being burned.

Pricey soda

We SODA’S decision not to go ahead with its float in London is being billed as a big blow for the City and the stock exchange.

And of course it is disappointing. Yet there are credible reasons why investors didn’t fall head over heels for this Turkish delight: the Ciner family, which owns WE Soda, has no public track record in the UK.

And, according to analysts, the owner was hoping to list at a peak multiple of between seven and ten times earnings, taking advantage of the current high price for soda ash.

That’s much higher than the average of its industry competitors, which are valued at five times. Sounds as though the float failed for old-fashioned reasons – it was too pricey – rather than having any bearing on the health of London’s capital markets.

Soda will be welcomed back to London if it can’t get the right price in New York.

Back to basics

More black stuff is making a comeback.

National Grid is in talks with Drax, the huge power plant in North Yorkshire, about bringing coal-fired units back to life to stop power cuts and avert winter blackouts.

It seems burning coal is more reliable than shipping wood pellets 2,000 miles from Mississippi to Selby to be green. Funny that.

This post first appeared on Dailymail.co.uk