The Bank of England isn’t coming to save Rachel Reeves – no one is ...

The Bank of England isn’t coming to save Rachel Reeves – no one is
Kate Andrews Economics Editor at The Spectator in The Telegraph
Andrew Bailey has not exactly garnered a reputation for being ahead of the game. Nor is he known for keeping governments afloat. Yet a great deal of faith has been placed in the Bank this year: its control over interest rates is thought in some circles to be the make-or-break factor for Labour’s growth agenda.

Many assume the Bank is going to ride in and save the Government from economic stagnation. But no one is coming to the rescue. Not the central bankers. Not anyone.

The harsh reality was on display this week. The Monetary Policy Committee voted 7 to 2 to reduce the Bank rate to 4.5pc . Alongside that decision was a scathing assessment of the state of the economy.

Rates may be coming down but inflation is set to peak at 3.7pc this year. The underlying pressures – mainly on energy prices – are thought to be temporary, it’s a painful reminder that the cost of living crisis Labour promised to tackle is not obviously improving.

It’s a reminder of what has not been done, including Labour’s promise to cut energy bills by up to £300. The problem isn’t that this pledge hasn’t been delivered yet; the problem is that the Party has all-but dropped that pre-election promise, realising, perhaps, that their plans were never going to deliver such a reduction.

Worse still are the Bank’s latest growth projections, which have been cut in half from 1.5pc this year right down to 0.7pc.

Very slow and very steady rate cuts are necessary to create the right conditions for economic growth. But they are by no means sufficient. The Bank’s update this week makes that point with complete clarity. Rates can come down, but that does not mean the economy turns around. The economy is set to remain relatively stagnant for a while longer.

The root problem is that the Government is not addressing the fundamental problems facing the economy, including the growth-crushing measures in the Chancellor’s first Budget.

Speaking after the rates announcement, Bailey noted that the downgraded forecasts are, in part, a reflection of the bloated public sector, which has grown in size and shrunk in productivity.

“It is fair to say we have seen an increase in public sector employment,” the Governor noted. “We haven’t seen a commensurate increase in measured public sector output.”

Of course, it was this Government that decided to make its first big spending announcement one of inflation-busting pay rises for the public sector.

A succession of ministers pinned their hopes on a belief that something, somewhere, would turn up to get the economy moving at faster pace, to deliver the kinds of output necessary to make public service funding sustainable.

It never did, because that kind of magic fix doesn’t exist. And the more burdens you pile on employers with tax and regulations, the harder it gets. No small rate cut can undo all that damage.