ALEX BRUMMER: The more assistance Treasury provides due to rising energy prices, harder it becomes for Bank of England to tame prices
- If prices are to be brought down, Bank must move more decisively to raise rates
- Bank must end its gradualism and act without delay
- If Andrew Bailey finds taking the lead too painful he should consider his position
In one mighty triple jump, Rishi Sunak has repaired his reputation as the Chancellor supporting the poorest households with their energy bills in their hour of need.
He is also assisting better-off citizens, since his £400 cash handout is going to every residence which means that second home owners will get double-bubble.
And the Chancellor, who two years ago gave us ‘Eat out to help out’ at a cost of £850m, is dangling the carrot of more help next year should the oil and gas emergency continue.
Looking ahead: Chancellor Rishi Sunak has set a trap for for Bank of England boss Andrew Bailey
Having punished us all with a rise in national insurance contributions and a freeze on tax allowances in 2021 he is now loosening the purse strings again. The latest package, if the energy loans turned into grants are included, amounts to £21billion, and that is in addition to two previous efforts.
The forensic Institute for Fiscal Studies says the Chancellor’s support is in effect a £37billion injection into the economy.
The closer the country moves towards the next election, the more generous the Chancellor is likely to become.
The paradox is that, until now, fiscal policy, by squeezing disposable incomes, has been working (or should be working) in tandem with monetary policy.
The goal is to crush demand and bring runaway inflation at 10 per cent back under control if not down to the 2 per cent target.
Sunak is making the task of a discredited Bank of England even harder. The looser the fiscal stance, the harder it will be for Andrew Bailey and the interest rate-setting Monetary Policy Committee (MPC) to put the inflation genie back in the bottle.
There is circularity in all of this. The more assistance the Treasury provides because of rising energy prices, the harder it becomes to tame prices.
The Bank is doing a terrible job in completing its main task of suppressing inflation. Instead of being the bad guys, who come down hard on price surges, the Bank has sought to be a friend of the consumers, backer of climate change initiatives and fighter against unemployment, all at the same time.
Bailey has taken the blame for a tendency which started with his predecessor Mark Carney and pervades the groupthink of the Bank insiders.
When Andrew Haldane, the Bank’s last chief economist, spoke out of turn he must have felt isolated and unloved and left the sinking ship.
It is not just looser fiscal policy, surging energy prices and potentially ‘apocalyptic’ food prices which are a problem for the Bank. Britain’s labour market recovered from Covid much more quickly than anyone expected. So the UK is blessed with a low unemployment rate.
This is a good thing because it means more payroll and income tax for the exchequer, shorter dole queues and fantastic opportunities for those people seeking to fill the estimated million or so vacancies.
The difficulty is that the workforce has shrunk from 34.2m in the final quarter of 2019 (pre-Covid) to 33.8m in the early months of 2022. There is a bit of ‘great resignation’ about this. Officially, 49,000 people have taken early retirement.
Some 55,000 people decided to opt into full-time study (which is brilliant if they are reskilling for the economy).
But there are another 156,000 who have dropped out of the employment numbers because ‘they are looking after family and home’. MPC member Michael Saunders suggests this may be pandemic-related due to long Covid and backlogs in the NHS.
The tightness in the labour market is beginning to drive up wages. The extra bargaining power is emboldening unions who have been flexing their muscles on the railways, the bus networks and even at the Financial Conduct Authority.
Bailey and the MPC can no longer be soft and cuddly interest rate-setters. If prices are to be brought down, the unions defeated and savings kept intact, the Bank must move much more decisively to raise rates.
There will be howls of protest from home owners with oversized mortgages. Property prices may by disembowelled and it is possible, but not certain, that recession and unemployment could be triggered.
The Bank must end its gradualism and act without delay. If Andrew Bailey finds taking the lead on this too painful then he should perhaps reflect on whether he is really the right person to deal with the mammoth task ahead.