The big news from today’s Bank of England decision is that four of the Monetary Policy Committee’s nine members wanted a bigger rise in interest rates than the 25 basis-point rise that occurred. Michael Saunders, Dave Ramsden, Jonathan Haskel and Catherine Mann all called for a 50 basis-point rise to 0.75 per cent.

Dissent in this scale is unusual, so it’s unsurprising that sterling has soared on the back of the news. But, having skimmed the minutes of the vote, we’re wondering why the four didn’t call for an even bigger rise. Here’s the write-up on why they plumped for 50 basis points: (our emphasis)

Four members judged that a 0.5 percentage point increase in Bank Rate was warranted at this meeting. Monetary policy had been very accommodative, and capacity pressures were now widespread, especially in the labour market. The projected path for CPI inflation was again being revised up over the first two years of the forecast period, while medium-term inflation expectations remained relatively high and on some measures had increased further. Companies responding to the Decision Maker Panel had indicated that they expected to raise prices significantly in 2022. The strong pick-up in pay settlements reported to the Bank’s Agents, and the recent broadening from goods price to services price inflation, suggested that these developments were now being reflected in domestic costs and prices, which could make CPI inflation more persistent than was expected in the February Report central projection. Monetary policy should tighten to a greater extent at this meeting in order to reduce the risk that recent trends in pay growth and inflation expectations became more firmly embedded and thereby help to bring inflation back to the target sustainably in the medium term.

Inflation is, according to the Bank, going to hit 7 per cent this year. If these four monetary policymakers really do think there’s a risk that prices keep rising at that pace for the foreseeable future, shouldn’t bank rate be an awful lot higher than 0.75 per cent?

One could argue that the Bank’s policymakers want to be seen as consistent in their communication. A 50 basis-point rise would have surprised investors, for sure. Yet shock-and-awe measures of far more than 50 basis points did occur during the early days of the financial crisis. Rates were also cut by 50 basis points in March 2020.

On the flipside, if the other five members don’t think it’s the case, why are they backing a rate hike at all? People in the UK have just been told that their energy bills are going to rise by more than 50 per cent. For those with a flexible rate mortgage, the Bank’s hike will only add to the squeeze on their disposable incomes. Less disposable income means lower demand — a situation that’s supposed to be addressed by, err, lower rates.

The Bank’s decision, by boosting sterling, will mitigate the impact of the rise of imported prices. But the main reason behind the move seems to be the view that, by raising rates, the Bank might influence expectations of future inflation.

We’re far from convinced that’s the case.

Andrew Bailey emphasized today that the inflation we’ve had is due to a “terms of trade” shock, and that the price rises we’ve seen of late were not the sort that are in the gift of the Bank to control. That may be right. Threadneedle Street has little say on global shipping rates or the cost of natural gas. But, if there’s war in Ukraine and energy prices rise further, we fail to see how rate hikes by the Bank will do any good in stemming calls for higher wages. We think calls for better pay are far more of a function of the cost of living than they are the Bank’s inflation goal.

The fuzzy logic behind today’s decision says a lot about a more fundamental flaw of inflation targeting. When the framework was devised, it was assumed that, in a globalised world, any terms of trade shocks would be short lived and need not concern policymakers focused on what will happen to prices in the years ahead. The pandemic has shown that is not a safe assumption to make. The merits of the regime were oversold. And now we’re all paying for it.