UK interest rates are too restrictive

The Bank of England cut interest rates to 4.5 per cent last week. A gradual approach gives the central bank more flexibility at a time when economic clarity is lacking

The Bank of England’s decision to cut interest rates by 25 basis points last week was widely anticipated, but it still stunned some economists. That’s because Catherine Mann, the Monetary Policy Committee’s arch-hawk, suddenly switched from calling for the cost of credit to stay where it is, to voting for a jumbo half-point cut. Her argument, outlined in an interview in the Financial Times on Tuesday, was that Britain’s economic outlook had weakened substantively, putting rate-setters on the back foot. As things stand, she is not wrong.

At 4.5 per cent, the bank rate is well above most estimates of the so-called neutral rate, the point at which monetary policy is neither expansionary nor contractionary. Inflation is close to target, at 2.5 per cent, and with the UK economy treading water, weak demand should keep a lid on further price pressures.