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ALEX BRUMMER: The Chancellor sets a trap for the head of the Bank of England

ALEX BRUMMER: The more aid the Treasury provides due to rising energy prices, the harder it is for the Bank of England to tame prices

  • If prices are to be lowered, the bank must be more decisive in raising interest rates
  • The bank must end its phased approach and act without delay
  • If Andrew Bailey finds leadership too painful, he should reconsider his position

In a mighty triple jump, Rishi Sunak has restored his reputation as Chancellor, helping the poorest households with their energy bills in their hour of need.

He’s also helping better-off citizens as his £400 cash issue goes to every resident, meaning second home owners get a double bubble.

And the Chancellor, who gave us ‘food to help’ at a cost of £850million two years ago, is dangling the carrot for more aid next year should the oil and gas emergency persist.

Looking ahead: Chancellor Rishi Sunak has set a trap for Bank of England boss Andrew Bailey

After punishing us all with an increase in social security contributions and a freeze on personal allowances in 2021, he is now loosening the purse strings again. The latest package, including energy loans converted into grants, totals £21 billion, on top of two previous efforts.

The Forensic Institute for Fiscal Studies says the Chancellor’s support is actually a £37billion injection into the economy.

The closer the country gets to the next election, the more generous the Chancellor is likely to be.

The paradox is that, until now, fiscal policy has (or should have) worked in tandem with monetary policy in depressing disposable incomes.

The aim is to dampen demand and bring the runaway 10 percent inflation back under control, if not towards the 2 percent target.

Sunak makes the task of a discredited Bank of England even more difficult. The looser the fiscal stance, the harder it will be for Andrew Bailey and the rate-setting Monetary Policy Committee (MPC) to put the inflationary genie back in the bottle.

There is circularity in all of this. The more help the Treasury provides for rising energy prices, the more difficult it becomes to tame prices.

The bank is doing a terrible job of fulfilling its primary purpose of suppressing inflation. Rather than being the bad guys who react harshly to price spikes, the bank has strived to be a friend to consumers, a supporter of climate change initiatives and a fighter against unemployment at the same time.

Bailey has taken the blame for a trend started by his predecessor, Mark Carney, that permeates the groupthink of banking insiders.

When Andrew Haldane, the bank’s last chief economist, stepped out of line, he must have felt isolated and unloved and abandoned the sinking ship.

It’s not just looser fiscal policy, rising energy prices and potentially “apocalyptic” food prices that pose a problem for the bank. The UK labor market recovered from Covid much quicker than expected. So Britain is blessed with a low unemployment rate.

That’s a good thing, because it means more payroll and income taxes for the treasury, shorter unemployment benefit queues, and fantastic opportunities for those looking to fill the estimated 1 million or so job vacancies.

The difficulty is that the workforce has shrunk from 34.2m in the last quarter of 2019 (pre-Covid) to 33.8m in the first months of 2022. There’s a bit of “great resignation” about it. Officially, 49,000 people have taken early retirement.

About 55,000 people chose to study full-time (which is great if they’re re-skilling for business).

But there are another 156,000 who have dropped out of the workforce because “they are taking care of families and households”. MPC member Michael Saunders suggests this could be pandemic related due to long Covid and backlogs in the NHS.

The tightness of the labor market is starting to drive up wages. The extra bargaining power is emboldening unions, who are flexing their muscles on the railroads, bus networks and even the Financial Conduct Authority.

Bailey and the MPC can no longer be soft and cuddly rate-setters. If prices are to be cut, the unions crushed, and savings kept intact, the bank must be much more aggressive in raising interest rates.

There will be howls of protest from homeowners with oversized mortgages. Real estate prices could explode and it is possible, but not certain, that recession and unemployment could be triggered.

The bank must end its phased approach and act without delay. If Andrew Bailey is finding it too painful to take the lead here, perhaps he should consider whether he really is the right person for the mammoth task ahead.

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ALEX BRUMMER: The Chancellor sets a trap for the head of the Bank of England

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