The Bank of England has long faced accusations of groupthink.
Reforms have been suggested – and some implemented – yet it continues to struggle with this criticism , as reported by .
Economists from the Cato Institute and the National Institute of Economic and Social Research (NIESR) have, for instance, blamed Threadneedle Street's peculiarities for the inflation spike following Russia's full-scale invasion of Ukraine.
However, as the City awaits the Bank's next monetary policy decision on Thursday, it's evident that a spirited debate surrounds monetary policy.
Whilst the doves will remain dovish and the hawks will continue hawking, it is quite apparent – "almost certain" – that interest rates will be reduced by 25 basis points, lowering the Bank Rate to four per cent.
This isn't due to an absence of conflict and disagreement over contradictory data that allows Bank officials to vote peacefully, but rather because of the Monetary Policy Committee's overall complexity – with its anticipated disputes over interest rate direction – that the Bank's decision will appear warranted. .
Nevertheless, nothing about the Bank's decision to reduce interest rates will be confident.
Bank of England's battle with Ƶ economy
Inflation has risen to 3.6 per cent in the year leading up to June, surpassing economists' predictions. The growth of prices could potentially escalate to as high as 3.8 per cent by September.
With services inflation lingering around 4.7 per cent, it may seem unusual under different circumstances for the Bank to decide on a reduction in interest rates.
However, employment figures are deteriorating. Unemployment has increased by 0.3 percentage points within a few months, job platforms are indicating a crisis in new listings, and participants in key surveys conducted by S&P Global suggest that job cuts have not yet decelerated.
Demand is predicted to plummet dramatically, according to most forecasters.
Reports from Bank of England agents to the MPC regarding price expectations among businesses present a varied image: results for the second quarter of the year, published in mid-June, indicated a slight easing in expected price growth for the upcoming year from previous surveys, but still remaining at 3.7 per cent.
The distress of a cost of living crisis, confusion over what tariffs mean for businesses, and rapid developments in Ukraine and the Middle East have left British minds bewildered. The continuous threat of tax increases has also been harsh on decision-makers in small businesses, large corporations and policymakers at the Bank.
Rate-setters frequently discuss the conflicting data points that cause them concern. Following the decision in March, the impact of tariffs on prices dominated conversations.
After May, there was much discussion about increased wage growth. Now, it seems that Bank members are more concerned about issues within the labour market.
This indicates that groupthink remains an issue the Bank has yet to resolve. However, the current Monetary Policy Committee (MPC) can hardly be accused of being a herd of sheep under the watchful eye of Andrew Bailey, who himself appears ready to challenge both the government and the markets.
The upcoming Thursday's meeting is widely anticipated to be the second instance of a three-way split in the MPC in three meetings.
Hawks vs Doves | Description |
Huw Pill | Pill has declared war on the doves, calling for the Bank to stop making quarterly cuts and slow down its rate-cutting cycle. He is most likely to vote for interest rates to be held after inflation ticked up in the year to June. |
Megan Greene | Greene has previously voted for interest rates to be held when others voted for a cut. She has previously advocated for a “wait-and-see” approach, which suggests Greene could want to see further evidence of jobs declining before she votes for a cut. |
Clare Lombardelli | Lombardelli referred to her previous vote for a cut as an “insurance” against the disinflationary effects of President Trump’s aggressive tariffs. But those tariffs may not be as bad as they had once seemed. She may think twice about whether the Ƶ jobs market is as bad as some forecasters say it is, and whether an “insurance” cut is necessary. But perhaps voting for interest rates to be held would not make sense according to the Bank’s central forecast on monetary policy and wider concerns about weaker demand levels. |
Catherine Mann | Mann’s highly unpredictable “activist” strategy could see her vote for a 50 basis point cut on the evidence the labour market was deteriorating or vote for a hold on the basis that wage growth remained elevated. |
Sarah Breeden | Breeden has indicated that she agrees with markets that monetary policy will loosen. It seems sensible to believe she will vote with consensus, but you never know. |
Andrew Bailey | Bailey has been vocal about his concerns about the labour market. His recent comments suggest he is taking a more dovish view on the Ƶ economy and interest rates. |
Dave Ramsden | Ramsden voted against consensus for a 25 basis point cut at the last meeting when the Bank of England held interest rates at 4.25 per cent. Bank watchers will be keen to find out whether he goes a step further and calls for a 50 basis point cut. |
Alan Taylor | Taylor, who admitted he was “activist” during an interview in May, is likely to push for interest rates to fall lower. Weak jobs data provides him with a cause to vote for bigger cuts. |
Swati Dhingra | There is almost no evidence to suggest Dhingra will vote with consensus for a 25 basis point cut. |
Accommodative committee members Swati Dhingra and Alan Taylor are regarded as the most probable to choose a 50 basis point reduction amongst analysts, according to ING and Oxford Economics.
Dhingra, an Indian economist who contributes knowledge in international commerce, has even quipped she would support a full percentage point reduction. Chancellor Rachel Reeves, who has consistently championed interest rate reductions as though it were Labour's own initiative, supported Dhingra by extending her appointment on the Bank's MPC earlier this year.
Taylor, meanwhile, informed former Labour politician Ed Balls during a May interview that he considered interest rates were a "long way" from reaching a neutral position. At the opposite end of the scale sits the Bank's chief economist Huw Pill, who seemed to express remorse in May when he indicated that interest rates had been reduced prematurely as inflation started to moderate following its 11.1 per cent peak in October 2022.
He argued that quarterly reductions had been "too rapid". As a pivotal figure within the Bank's MPC, Pill even advocated for shifting the policy approach from "careful and gradual" to "cautious and gradual" owing to altered price and wage-setting patterns.
Jonathan Haskel, the former external MPC member who stood as the sole economist on City AM's Shadow MPC to support maintaining rates, highlighted that inflationary pressures continued to be excessive despite indicators showing wage growth had declined marginally.
Deutsche Bank's Sanjay Raja widely anticipates that Pill will support keeping interest rates at four per cent, with Catherine Mann potentially following this approach.
However, Mann remains unpredictable. The American economist supported a 50 basis point reduction in February whilst others backed a 25 basis point cut, yet advocated for maintaining rates in May when her peers voted for a reduction.
Similar to Taylor, she has characterised herself as an "activist" MPC member.
Future interest rate cuts hang in the balance
Each member will undoubtedly conduct their own considerations when required to cast their vote. Some will have remained awake throughout last night and may find it difficult to rest well this evening.
However, another three-way division will demonstrate that the Bank's rate-setters are participating in worthwhile discussions about monetary policy, and will not automatically vote for an interest rate reduction simply because markets expect it.
Discussions will intensify in the forthcoming months as the rate-cutting cycle nears its conclusion. Mann presented an hour-long address on the neutral interest rate, the level at which an economy achieves equilibrium and inflation remains stable, only for Bailey to evade questions about it during a recent Treasury Committee session.
Taylor, conversely, condemned Bailey's "counterproductive" dismissals as he has urged the MPC to tackle the questions directly.
Whilst economists across the English Channel are pondering whether the European Central Bank will maintain its deposit facility rate at two per cent for the foreseeable future, City analysts are already debating how many interest rate reductions lie ahead.
Pantheon Macroeconomics considers August's reduction will be a "one-and-done" affair, markets anticipate rates will decline to 3.5 per cent by the end of 2026 and PIMCO and Morgan Stanley economists predict six cuts are scheduled to arrive in the next year. It appears probable that these types of disagreements will emerge at future MPC gatherings.
Following the last three-way division, Shadow MPC member Julian Jessop, who was formerly deputy chief global economist at Capital Economics, described the "lack of groupthink" as "something to cheer". "It would be more worrying if nine rate-setters all came to exactly the same conclusion despite the many unknowns, including the fallout from a global trade war," he said.
The Bank is legally required to achieve a two per cent inflation target. If it fails significantly to reduce inflation, it will be difficult for critics to attribute errors of judgement to groupthink.
The MPC can assert that they have gleaned some lessons from the previous period of instability just three years ago.
