Bank of England Is Vindicated as Growth Deteriorates

(Bloomberg View) -- The Bank of England has taken some stick for inconsistent messages on interest rates. Well, it's better to be right than to appear consistent. The bank's decision this month, to hold fire on an increase, looks better by the day. 

Revised numbers on second-quarter growth released this week look pretty shabby. Consumer spending, the lifeblood of Britain's economy for decades, barely grew at all, and business spending stagnated. That's especially disappointing given that the euro zone next door -- derided by euroskeptics as a place of sclerosis, strangled by regulation -- is going from strength to strength.

For a while it looked as though Brexit's doomsayers had it wrong. There was no Brexit catastrophe, at least for a while. Even now, the labor market is doing well, with the jobless rate down to 4.4 percent, the lowest since 1975. Why then is the consumer missing in action? 

Something doesn't seem right. Perhaps the fault lies with the pound's tumble against the dollar since the referendum. That currency slide is also helping drive up inflation, which at 2.6 percent easily exceeds the Bank of England's target of 2 percent. 

Ironically, all else being equal, inflation would be a perfectly reasonable justification for a rate increase. Here's one economy where inflation is actually doing what it is supposed to do! 

All is not equal. Even a modest step, like a quarter-point increase to take back the rate cut that followed last year's referendum, would confront terrible optics. Wrong time to be signaling a change in policy.

Rewind the tape to late June. Governor Mark Carney appeared to be signaling an impending hike when he addressed the European Central Bank's version of Jackson Hole, in Portugal. In the end, the vote at the Bank of England this month was 6-2 to demur.

The decision looks like it was a very smart one. Things will get really interesting if inflation doesn't start receding, and growth doesn't pick up.

More than a year on from voting to leave the EU, Britain's economy is at, or near, the bottom of the Group of Seven. Britons wanted to take back control. This is what that looks like.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg View. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

To contact the author of this story: Daniel Moss at dmoss@bloomberg.net.

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