Bank of England pushed Britain into recession, economists say

The Bank of England has pushed the UK into recession by refusing to clearly communicate its plans to cut interest rates, top economists have warned.

Britain fell into a recession at the end of 2023, according to estimates by the National Institute of Economic and Social Research (NIESR), as GDP fell by 0.1pc in part because of the Bank’s insistence high interest rates would not fall soon from their current 16-year high of 5.25pc.

Ben Caswell, an economist at NIESR, said “a little bit of forward guidance may have helped tip [the UK] out of a technical recession”.

He added: “In comparison with the Federal Reserve or the ECB, the Bank of England has been a bit less communicative regarding when rate cuts are likely to take place.

“The Bank of England takes this stance where they say, ‘When is a rate cut going to happen? We follow the evidence and will make a decision when the time is right.’ Whereas if you look at the Fed, they say, ‘We think rate cuts are likely during a given period’.”

Preparing financial markets in the Fed’s manner helps lower borrowing costs for households and businesses even before interest rates are formally cut, which “can minimise the economic pain”, said Mr Caswell.

NIESR said it expected inflation to drop below the Bank’s 2pc target in the second quarter of this year when the energy price cap falls again.

This will prompt the Bank of England to start a series of rate cuts in May, the think tank said, taking its base rate to 3.25pc by early 2026.

It comes as job vacancies have fallen below their pre-pandemic levels for the first time, bolstering hopes the Bank can cut interest rates soon.

Figures from Indeed, the jobs website, showed ads for new roles are now 5pc lower than in February 2020.

The downturn spells an end to the post-pandemic hiring boom that resulted in soaring vacancies and employers facing stiff competition over workers.

Rate-setters in Threadneedle Street will welcome the news as a sign that higher interest rates are successfully cooling the economy.

The tight labour market and surging pay growth have been key concerns for policymakers battling inflation.

Swati Dhingra, the only member so far of the nine-strong Monetary Policy Committee to have voted for a rate cut, told the FT in an interview that “you might see the real economy start to get negatively hit in a more profound way — and I don’t see why we should be risking that”.

Separately, a report by the Treasury Select Committee warned the Bank of England should not rush to print money during the next financial crisis.

MPs said rules surrounding so-called quantitative easing did not do enough to shield taxpayers from unnecessary losses, describing the unwinding of its massive bond buying programme as a “leap in the dark”.

While the committee insisted the Bank’s operational independence remained paramount, it called for more transparency over bond sales as the Bank estimated taxpayers faced an £80bn hit based on current interest rate predictions.

“It strikes us as highly anomalous that decisions have been and are being taken concerning huge sums of public money without any regard to the usual value-for-money requirements,” MPs warned in a report.

“Given what we now know, any future quantitative easing should not proceed automatically under the existing arrangements. Instead, the arrangements should be revisited in the light of the implications for value-for-money, public spending and Bank independence.”

Harriett Baldwin, chairman of the committee, said: “It has become clear during the course of this inquiry that the decision to undertake a period of quantitative tightening is a leap in the dark for the UK economy.  

“I recognise that the Bank of England does not have a crystal ball and is in uncharted waters, but more can be done to develop forecasting and modelling tools which can help us understand the risks and benefits of quantitative tightening.”

A Bank of England spokesman said: “We welcome the Committee’s report and will consider its findings carefully before responding. We continue to encourage active debate about our monetary policy decisions and their implementation.”