Never mind the politics. The Bank of England must cut interest rates now to save the economy

Bank of England Andrew Bailey composite

In monetary policy there is an important tool known as the Taylor Rule. Named after the Stanford economist John B. Taylor, it helps central banks decide on what interest rates should be in order to control inflation. Despite the significance of the Taylor Rule in monetary policy, the policymakers at the Bank of England will perhaps be paying more attention to Taylor Swift.

That is according to analysts at TD Securities who have forecasted that the London leg of Swift’s Eras Tour could increase services inflation by 0.3%. As such, the Monetary Policy Committee is likely not to vote to lower Bank Rate this summer and instead wait until September. And it’s not just Taylor Swift who analysts think might delay a cut to interest rates. The fact that the UK is in the middle of a General Election has led to speculation that the Bank will hold off lowering rates so as not to be seen to be helping out the government by eating pressure of household finances.

But as important as Taylor Swift and the General Election are, it would be a mistake for the Bank to keep interest rates at their current levels.

The impact of Taylor Swift on local economies is a real phenomenon. We do see an increase in demand for services such as those in hospitality whenever there is a Swift concert. This will worry the MPC, not least of all services inflation has remained stubbornly high in the UK, but it shouldn’t base its decision on this.

The Eras Tour might represent a shock to the economy, it will only be a temporary one as Swifties around the UK will lament - they’re prepared to pay a small fortune to see her as she is only performing for a few nights. As such, the impact of Swift on the economy will not be permanent and so things should swiftly return to normal. What is more, while we may not be in a new era, the economy has turned a corner as the core drivers have subsided and inflation is returning to target.

The reason we put monetary policy in the hands of independent technocrats and why it has worked so well – not counting the last few years – is because it can no longer be used as a tool by politicians during election campaigns.

As for the General Election, the MPC despite its many failings is not politically biased. However, it will be keen to show this to the world. The danger with trying to show that it is not biased though is still a political decision which it should not be making. The reason we put monetary policy in the hands of independent technocrats and why it has worked so well – not counting the last few years – is because it can no longer be used as a tool by politicians during election campaigns.

The MPC should make its decision based on data and all the evidence shows that the Bank’s restrictive monetary policy has worked as intended. Inflation has fallen sharply and will be revealed to have fallen to around the target of 2 per cent last month.

Moreover, the negative impacts of high interest rates have been evident for months. While the country is not technically in a recession, economic growth is stagnant and looks set to remain so for the foreseeable future. Perhaps more worryingly is the labour market. While it is tight by historical standards, we have seen it start to loosen and the unemployment start to increase. Given that there tends to be a lag with the effects of monetary policy, we should expect to see these issues continue and get even worse months from now based on what interest rates are in the next few weeks. The Bank of England needs to start cutting interest rates now.

Very high inflation is intolerable and it is right that the Bank prioritises tackling it, but if it is a choice between inflation being slightly higher that target or high levels of unemployment we should choose the former.

The Bank of England should pay little attention to the other Taylor Rule or the General Election. Inflation is returning to target and there is a chance that it will soon be below target. The MPC has done its job in tackling inflation, it now needs to start cutting interest rates to avoid causing further harm to the economy.

Ben Ramanauskas is an economist. He previously worked in academia and as an advisor to the UK government.

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