For the last six years, or so, the UK economy was reliant on the Bank of England.
At least that is how it appears. This has changed, maybe that’s why the Bank of England chose to keep rates on hold, yesterday.
George Osborne banged the drum of austerity for six years. One can debate whether he really practised what he preached, in fact government borrowing is still high, and the former chancellor kept delaying the projected point when the budget deficit turned into surplus. But at least he spoke the words of austerity.
And in the language that was common during the Osborne years, cuts in public spending were essential in order to enable the Bank of England to keep interest rates low.
All of sudden, austerity doesn’t seem to matter.
Bearing in mind that the government can go out and borrow money for ten years and pay an interest rate of around 0.75 per cent, the idea that it shouldn’t borrow to invest and stimulate the economy did seem a little nonsensical.
And with Philip Hammond at number eleven, a new language is being adopted, or so we are led to expect.
For years we were told that the markets wanted austerity, that they wanted to see a harsh regime of cuts, to cool their wrath.
It turns out that under the soft and cuddly Theresa May, who cares about the poor, and lack of public investment and in protecting UK firms from overseas predators, the markets are more than happy, they have been buying.
They have been buying in the US too, where the S&P 500 hit a new all-time high yesterday.
And in the midst of all this, Mark Carney, and his chums at the Bank of England’s monetary policy committee, only went along and did nothing.
Rates are on hold for another month, and few expected that. The money was on a rate cut.
Why did the MPC vote eight to one to keep rates on hold?
For one thing, now that austerity seems to be off the agenda, the need for a rate cut reduces.
For another thing, the markets are happy enough as it is, what with it being Theresa’s honeymoon ‘n all.
But, if rates had been cut yesterday, speculation would have immediately started on when the next rate cut would be. And this would have put sterling under new pressure.
The Bank of England has surely only delayed the rate cut by a month, but that delay may be enough to soothe the markets’ temper, and reduce speculation of further cuts, and maybe in the process alleviate pressure on the pound.
It’s early days, of course, honeymoons come to an end. And we have actually heard very little from Philip Hammond on what he will do. Not so long ago he seemed like something of a hawk, saying households had to take some responsibility for the 2008 crash, because they borrowed too much.
Well, let’s see what happens next.
By Michael Baxter, economics writer, author and entrepreneur