M&S Chair Says UK Rate Rises Have Been ‘Totally Ineffective’

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(Bloomberg) — The Bank of England’s efforts to bring down inflation have been “totally ineffective” because most price changes have been beyond the central bank’s control, one of the UK’s top business figures said.

Archie Norman, chairman of the retailer Marks & Spencer Group Plc, said that the most aggressive UK cycle of interest rate rises since the late 1980s “didn’t actually reduce inflation very much.”

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Since December 2021, the BOE has raised its benchmark lending rate from 0.1% to 5.25% to tame inflation, which peaked at 11.1% in late 2022. While the Consumer Prices Index has since dropped back to 4%, it’s still twice the bank’s 2% target.

About the role monetary policy played in controlling prices, Norman said: “There’s a marginal effect, but inflation was driven by global macro prices. It had no bearing on the price of gas. It had no real bearing on the price of food.”

The comments raise questions about the central bank’s recent decision to hold rates at 5.25% and the effectiveness of BOE policy in the modern economy. Rate rises have become increasingly political in a year in which there will be a general election as rising borrowing costs have put homeowners under pressure.

Prime Minister Rishi Sunak is hoping for early rate cuts to lift the economy out of a shallow recession and boost the Conservatives’s electoral chances. Fellow lawmakers, worried the ruling party is trailing the Labour opposition by 20 points in polls, are calling on the BOE to pivot toward lower borrowing costs soon. 

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The BOE declined to comment. However, the officials remain concerned that the past spike in prices is filtering through to wages and services inflation, both of which are growing at over 6% — a level incompatible with the 2% target.

Dave Ramsden, deputy governor for markets, last month said rate hikes have been effective. “The restrictive stance of monetary policy increasingly weighed on activity through 2023 and has led to a loosening in the labor market.”

Norman’s remarks suggest the BOE’s role in managing the economy and inflation has been overstated.

“We probably sometimes listen to bit too much to central bankers,” said Norman, a former Tory member of Parliament who has been a leading figure in the UK retail industry for years. “The impact of higher interest rates hasn’t really materialized. House prices have on the whole being more robust than people thought.”

The BOE’s own figures suggest higher rates boost the economy more than they restrain demand. A hike in rates costs generated more income on the nation’s £1.7 trillion in savings than they add to the cost of servicing the £1.5 trillion of mortgages in the short term.

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“What we’ve proved in the last three years is that monetary policy is totally ineffective,” Norman said. “Putting up interest rates didn’t actually slow the economy very much.”

His remarks feed into a growing political debate about the BOE’s handling of inflation and whether it should soon pivot toward cutting rates in a bid to boost growth.

The impact of higher borrowing costs will overwhelm the tax cuts pushed thorough last week in Chancellor of the Exchequer Jeremy Hunt’s budget. The 4% cut in National Insurance contributions he has announced since November will save the average worker just £900. 

By comparison, the bank warned in December that just under 5 million households face an average £2,900 increase in their annual mortgage payment as they roll off existing deals between the June 2023 and the end of 2026. More than 2 million must reset this year. 

Hunt acknowledged that “tackling inflation is painful” because it “means higher interest rates.” Labour has branded the cost the Tory “mortgage timebomb.” Financial markets expect the BOE to start cutting rates in the second half of the year. 

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The BOE has said the big moves in inflation over the last two years have been largely beyond its control, driven instead by soaring natural gas and food prices after Russia invaded Ukraine. That and the pandemic disrupted supply chain disruptions around the world. sending the price of goods soaring.

Comments by Ben Broadbent, the BOE’s outgoing deputy governor for monetary policy, has even echoed Norman’s claim that rate hikes have made little difference to headline inflation. Broadbent told members of Parliament on the Treasury Committee that inflation has been “transitory,” as central banks originally expected. 

“That has proven to be the case,” Broadbent said at a hearing last month. “Most of the disinflation we have had — in fact, all of it over the last year — has been in tradeable prices, on energy and tradeable goods.”

BOE officials also believe that the impact of higher rates on the economy has almost passed. Two thirds of the impact on consumers and businesses is already being felt, it estimates. 

Yet those rate hikes have done little to rein in demand. Unemployment remains near record lows, at 3.8%. The economy dipped into a shallow recession at the end of 2023, contracting 0.5% in the final two quarters, but is now believed to be growing. The deep slump that the BOE forecast 15 months ago if rates reached current levels has not materialized.

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Even the property market has been largely immune to higher borrowing costs. House prices increased 1.2% in the year to February, according to mortgage lender Halifax. Transactions have fallen steeply as mortgages have become increasingly unaffordable, though.

John Neal, chief executive of Lloyd’s of London, the insurance market, said he was pleased the era of near-zero interest rates, which lasted 13 years, is over.

“We just weren’t used to what a real economy looks and feels like,” Neal said in an interview last month. “If the world’s about growth and opportunity, you can’t run with zero rates and zero inflation. There is no opportunity. Nothing operates on that basis.”

—With assistance from Andrew Atkinson.

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