“Not as green as Regent’s Park”

London Business School’s Professor Richard Portes was interviewed on Bloomberg Radio on the day the Bank of England made its latest announcement on interest rates (February 1^st 2024).

Anchors Tom Keene and Paul Sweeney asked Professor Portes for his opinion on what he thought is the principal difference between UK monetary policy and the Fed’s monetary policy.

With the Bank of England indicating that the next move in interest rates will be downwards after forecasting inflation will fall below 2% within months, despite keeping borrowing costs unchanged for a fourth consecutive time, Professor Portes said that the Bank of England had been consistently more hawkish than Fed.

“The last time a decision was made on interest rates, the BoE had three members of the monetary policy committee of nine voting for an increase in interest rates – that’s crazy! At the time we were getting close to a recession anyway and they wanted to increase interest rates, which is absolutely mad.”

Bloomberg’s Keene observed that a current external member of the BoE’s Monetary Policy Committee, Dr Catherine Mann, has been “pretty strident” and had been adopting a more hawkish tone, which had also been reflected at the Fed and the European Central Bank. What, asked Keene, was in the character of the hawkish tone that the Bank of England has adopted of late.

Professor Portes said that wage inflation had been a factor but thought that the “Red Sea story” (the economic impact of Houthi Red Sea attacks) “was overblown”.

“Wage demands have moderated and will continue to moderate. The pressures are strong against wage increases. Overall, I think the BoE is being overly cautious. The Bank has a real political difficulty because they are getting into election territory and indeed the Fed has also historically been loath to move rates when an election is coming up. It’s the same thing here in the UK.”

With the US economy producing solid economic data, what are the recession risks in the UK?

“There’s no doubt that the UK is in for prolonged period of stagnation,” said Professor Portes. “The IMF just reduced its forecasts for the economy, and rightly so. When I look out from my office, I see a lot of green out there in Regent’s Park, but I don’t see much of it in terms of green shoots in the UK economy”.