Interest charge

Bank of England MPC could vote to charge Light Brigade in September

“I’m very happy that there will be, as I understand it, announcements this week because I think it will help in a way to shape the policy and that’s important. I think it’s important that ‘there is a clear policy path forward’, BoE Governor Andrew Bailey.

Statue of Arthur Wellesley, 1st Duke of Wellington, is seated in the foreground of the Bank of England. Photo © Adobe Stock

The UK’s core inflation rate fell in August, but core inflation hit a new high as price pressures widened across the economy, adding to the risk that the Bank of England’s (BoE) monetary policy committee votes for something like its own modern charge of the Light Brigade in September.

The Light Brigade charge is described in some parts as a “disastrous British cavalry charge against heavily defended Russian troops” during the Crimean conflict, but there are parallels between this and what may be next. most likely of the BoE’s interest rate setters on September 22.

This is partly explained by the origin of much of the UK’s recent inflation, which is now largely the Russian invasion of Ukraine and its impacts on energy prices, but also because of the lengths the BoE may have to go and the risks it may have to take with the economy to deal with it.

“In the face of significantly higher gas prices resulting from the war in Ukraine, inflationary pressures in the UK and the rest of Europe have increased further, and global GDP growth has continued to slow. In response to the outlook high inflation rates, many central banks have raised policy rates and are expected to tighten policy further,” the August Monetary Policy Report said.


Source: Office of National Statistics.


Although much of the inflation in the UK comes from elsewhere, there is a risk that high levels of inflation will become a permanent feature of the life of the UK economy without the BoE intervening, even if this action could have negative consequences for the economy of the United Kingdom. the short and medium term.

If anything, the lengths the BoE can go to have been stretched by Wednesday’s inflation data for August and that’s partly why markets may be wrong in expecting the BoE is only raising the discount rate by 0.5% or 0.75% next Thursday, which would take the benchmark to 2.25% or 2.5%.

The risk could well be that the BoE announces an even bigger rate hike and unaware forecasters can ignore how much the BoE has been held back so far by the information lags created by the energy ‘price cap’ system and the recent absence of a fully functioning government.

Neither are more inhibitors of the Bank of England‘s rate setters.

“I’m very happy that there will be, as I understand it, announcements this week because I think it will help in a way to shape the policy and that’s important. I think it’s important that ‘there is a clear policy path forward’, BoE Governor Andrew Bailey told the House of Commons Treasury Select Committee last week.


Source: August Monetary Policy Report, Bank of England.


Meanwhile, the government of new Prime Minister Liz Truss has planned to use public funds to limit energy bills to £2,500 a year, protecting households from further rises that would have otherwise driven up the bill. energy at over £6,000. per year.

This limits the scale of the winter economic calamity to come, but it will also widen the budget deficit and could have the effect of preventing inflation from falling back to the 2% target in the years to come, hence the risk that the BoE will react quite aggressively next week.

This might surprise economists and markets, as many are used to slow and steady interest rate hikes from the BoE, although they may be forgetting that if the bank had acted aggressively before, she reportedly shot from the hip in a crowded room with the lights turned off.

Only time will tell what the monetary policy committee’s September 22 interest rate decision will be, although there is a clear risk of a “shock and awe” type decision which, for all the reasons set out above, would somewhat resemble that of the BoE. own modern charge of the light brigade.