Bank of England Leaves UK Bank Rate at 0.75%, GBP May Weaken Further

The Bank of England has left its policy on the Bank Rate unchanged at 0.75%. However, it is doubtful whether this is a good or bad thing. As the Bank rate has already failed to recover from the fall in interest rates in 2020, should the Bank remain in a neutral monetary policy stance?

On the face of it, it would appear that the Bank has adopted the same policy as it did in 2020. A low rate now and a low rate then. Although, it might appear that way, that fact that there was a policy of policy neutrality in 2020 could have been a signal that the Bank was reluctant to be too politically involved.

In 2020, it wanted to make sure that the market wasn’t over-run by short-term lending. Of course, it was right to be concerned about the financial stability of the UK’s creditworthiness and the credit crunch has made that concern greater than ever.

In the light of this positive news for the UK economy, it seems odd that the Bank of England would be politically involved in setting the Bank Rate. The Bank of England is the only major lender of UK Government Bonds. It has to be true that the Minister of Finance is in an awkward position about how to deal with a weak Bank Rate.

There was certainly an advantage to the Chancellor of the Exchequer in allowing interest rates to go up to their current level. Although he isn’t the central banker, he is still the man who sets the level of borrowing power. Therefore, if the Bank of England was politically involved, he could claim that he had done the right thing, by setting the policy at a neutral level.

The bond markets were hugely nervous in the months before the start of the credit crunch, and it seems unlikely that they would have accepted a no-policy position. Indeed, it might have been difficult for the Bank of England to claim that it was acting solely to protect the taxpayer when bond yields soared. The Chancellor of the Exchequer had to make the decision that he was taking the necessary steps to protect the bond market and that he wouldn’t be forced to print money, but that there might have to be a cost.

We don’t know what that cost might have been. Maybe it was that the low Bank Rate had to be sustained at a level that would attract deposits into the Bank of England.

Perhaps it was that the Bank of England needed to keep interest rates at a useful level so that the flow of new loans and deposits into the Bank of England was maintained at a sustainable level. Indeed, the Bank of England could claim that it has given the best possible security to those who are banks, and who had already lent in the past, to maintain the benefits of the Bank Rate at a useful level.

If it was the case that policy neutrality meant that the Bank could not set a low rate, then perhaps that policy was unsustainable. The Bank of England needed to increase its leverage to generate more income, but that meant spending more of the tax-payer’s money.

As we all know, the financial crisis came to a head in the summer of 2020, and the Bank of England became involved in a political battle with many of the big financial institutions. Again, the problem was that it had to spend money, which meant that there was less money available to spend on other, non-monetary purposes.

It was likely that the British people and the policy makers would lose out in the end, but it seems that policy neutrality was not the wisest policy move. To some extent, the Bank of England had to engage in politics to retain the credibility of its credibility as a lender of last resort.