Cogito Ergo Non Serviam
Bank of England Cuts Bank Rate to 4%
The Bank of England cut the Bank Rate (its benchmark rate) to 4% from 4.25%. It was a narrow decision, a 5-4 vote. Moreover, the 5-4 outcome in the Monetary Policy Committee was a second ballot. The original vote was 4 to keep the rate level, 4 to lower it by 25 basis points and one to lower it by 50 basis points. This level of disagreement is uncommon among central bankers in general and the BoE in particular. Consensus is driven by data that point in a clear direction with the banks having only to decide how much to change the rates and when. As the world enters a tariff-driven period of stagflation, the direction is no longer clear.
CNBC reported "Policy makers have had to weigh up sticky inflation -- the consumer price index (CPI) rose to a hotter-than-expected 3.6% in June from 3.4% in May -- with a cooling jobs market and lackluster growth. The U.K.'s gross domestic product contracted 0.1% month-on-month in May." Rising inflation and declining economic activity is the definition of stagflation.
In the end, the nine committee members decided that economic growth and jobs were more important than keeping inflation down. The BoE now expects inflation to rise, peaking at 4.0% (overly optimistic in the opinion of this journal).
BOE Governor Andrew Bailey said in a press conference Thursday that it "remains important that we do not cut bank rate too quickly or by too much" but added that "there are good reasons to think that this rise in headline inflation will not persist." He declined to enumerate them, and this journal can think of none.
George Brown, senior economist at Schroders, said the latest rate cut was no surprise, but said "the path forward is anything but clear."
"Jobs, growth and inflation figures all call for different policy prescriptions, as reflected in the unprecedented two rounds of voting needed to reach a majority," he said in emailed comments Thursday.
"Given the uncertainty presented by the conflicting data, the committee is right to stick to its 'gradual and careful' mantra," he said, adding: "Nervousness about the labour market might prompt another cut in November. But this will be difficult to justify unless disinflation is clearly underway. As such, we think there is a decent chance rates will not fall below the current rate of 4% this year."
Ashley Webb, UK economist at Capital Economics, disagreed. "Despite the unexpected rise in CPI inflation in June, we still think the weakness in the labour market means it's only a matter of time before wage growth and inflation slow to rates consistent with the 2% inflation target. We think the Bank of England will cut interest rates from 4.25% now to 3.00% in 2026, which would take rates below the low of 3.50% priced into the financial markets."
The MPC is divided and so are the analysts in the market. That means uncertainty is the order of the day, and in a stagflationary environment like this one, there are no good options, just varying degrees of bad ones. If the world is lucky, this will all blow over in a year or two as the market adjusts to the new anti-trade policies of the White House. If not, things could get very bad indeed.
Taking one cautionary tale to heart, Japan has still not really recovered from the Employment Ice Age of the 1990s and early 2000s. That was caused largely by the Bank of Japan raising interest rates to cool an overheated economy which caused a collapse in asset prices and massive deflation. Getting policy even a little wrong at a time like this can be disastrous.
Stagflation requires central bankers to fight a two-front war, and those are almost never successful without a great deal of suffering.
© Copyright 2025 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.
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