Aurelia Butler

According to Refinitiv Lipper, investors exited global bond funds worth $11.99 billion in their fifth weekly net selling in a row.Fanning inflationary fears, data last week showed strong U.S. consumer spending in March and a jump in labor costs in the first quarter, which raised concerns that the Fed would tighten policy more aggressively than planned earlier.After an expected 50 basis point policy rate hike on Wednesday, the Fed Chairperson Jerome Powell, ruled out raising rates by 75 basis point in a coming meeting, although he made clear that rate increases the Fed already has in mind were “not going to be pleasant”.U.S. and European bond funds suffered outflows of $5.58 billion and $6.24 billion respectively, while Asian funds had marginal selling worth a net $0.03 billion.Weekly net selling in global short- and medium-term bond funds jumped to over a four month’s peak of $6.9 billion but government bonds funds gained $6.18 billion in their biggest weekly inflow since at least June 2020.Meanwhile, weekly outflows from global equity funds eased to a four-week low of $1.79 billion.By sector, financials and tech witnessed net selling of $634 million and $483 million respectively, however, utilities and consumer staples received inflows of $497 million and $457 million respectively.Money market funds saw outflows of $10.79 billion after attracting purchases of $51.72 billion in the prior week.Commodities funds’ data showed precious metal funds faced outflows worth $402 million and energy funds posted net selling of $97 million in a seventh straight week of outflows.An analysis of 24,183 emerging market funds showed net selling in both equity and bond funds eased to a three week low of $565 million and $328 million respectively. More

It took a devastating combination of the pandemic, war in Ukraine and a central banking U-turn on inflation to do it. Since the turn of the year the rules of the game in markets have been dramatically upended. Gone are those notorious acronyms Fomo (fear of missing out), Tina (there is no alternative to higher risk equities and credit) and BTD (buy the dip). The ecstatic equity market response to what were initially seen as dovish signals in the US Federal Reserve’s tightening move this week quickly evaporated — a mere blip in what is now clearly a bear market. At least sanity appears to be returning to central bank policymaking.Having offered no convincing rationale for the continuation of their asset buying programmes long after the 2007-09 financial crisis, the central banks are now committed to raising rates and shrinking their balance sheets. That holds out the hope that after years of overblown asset prices and mispricing of risk, the information content of market prices will once again become meaningful. The biggest indication of a semblance of normality is the decline in the number of negative yielding bonds across the world, down to about 100 compared with 4,500 such securities last year in the Bloomberg Global Aggregate Negative Yielding Debt index. So the morally hazardous practice of paying people to borrow is on the way out, and the need to search for yield regardless of risk is becoming less intense. Benchmark 10-year US Treasuries are yielding close to 3 per cent, more than twice the level in late November. Since January, equity and bond prices have come down in tandem, so that a conventional 60/40 equity and bond portfolio has offered investors no diversification.The big question is whether this all marks the end of asymmetric monetary policy, whereby central banks have repeatedly put a safety net under collapsing markets while declining to curb irrational exuberance. In the short term the answer is yes, at least in the US. For as Bill Dudley, former head of the New York Federal Reserve, has remarked, the Fed wants a weaker stock market and higher bond yields. This tightens financial conditions, thereby reducing the need for policy activism.Yet before becoming too excited about the new thrust of a monetary policy that is being widely described as aggressive, it is important to note that the real policy interest rate remains negative. Core inflation, as measured by the Fed’s preferred personal consumption expenditures price index, stood at 5.2 per cent in March compared with the previous year, while the Federal Open Market Committee lifted the target range of the federal funds rate this week to just 0.75 per cent to 1 per cent. So while policy is being tightened it could scarcely be called tight.The risk of policy error is high because, as Fed chair Jay Powell admitted on Wednesday, a neutral monetary policy position which neither speeds up nor slows the economy was “not something we can identify with any precision”. The fear is that central banks may precipitate a recession at a time when global debt is at record peacetime levels. According to the Institute for International Finance, a trade body, global non-financial corporate debt rose from $81.9tn to a phenomenal $86.6tn between the third quarter of 2020 and the same quarter in 2021. This sum, equivalent to 97.9 per cent of gross domestic product, suggests a greater than usual corporate sensitivity to interest rate increases and a serious vulnerability. It may anyway take a recession to bring inflation back under control. And on Thursday the Bank of England warned that the UK economy will slide into recession this year while higher energy prices push inflation above 10 per cent. Members of the bank’s Monetary Policy Committee are clearly prepared to intensify the squeeze on household incomes in order to address worsening inflation. They voted to raise the main interest rate by a quarter point to 1 per cent, the highest level for more than a decade.The global economic picture is now darkening further in the wake of the pandemic because of China. Its zero-Covid policy and lockdowns are hurting demand, as have insolvencies in the property sector which is a disproportionately large chunk of the Chinese economy. This is bad news for, inter alia, continental European exporters who are also coping with the loss of the Russian market. The eurozone economy will be hard pressed to avoid stagflation.For the central banks, this recalls an old joke about a cab driver telling a lost tourist asking for directions: If I were you, I would not be starting from here. The Fed remains confident it can engineer a soft landing. That will require luck as well as judgment, which has not been much in evidence of late. There remains a real possibility of recession, which could breed panic in central banks and thus a return to asymmetric monetary policy and yet more quantitative easing.In truth, the central bankers are flying on a wing and a prayer. That is less than reassuring for people whose incomes are subject to a brutal contraction, even if it is superficially cheering for investors. [email protected] More

Are bikini waxes sticky during a recession? A chain of salons based in Texas, European Wax Center, is confident they are.Chief executive David Berg told investors this week that he based this optimism on “how quickly we rebounded coming out of Covid”, when customers soon “got back into their regular beauty care regimen”.Facing rising rates, soaring inflation and lower growth forecasts, many other executives were putting on a brave face during earnings calls this week.Companies that have spent years wanting to be considered as “tech”, for the racier multiples, now emphasise their dull reliability — staples rather than discretionary, value rather than growth. The message to investors: do not adjust your portfolios — we are safe. Airbnb’s Brian Chesky sees upside from the looming downturn. He reckons more people struggling with their rent and mortgages will turn to hosting paying guests. At the same time, he says, travellers will be more budget-conscious, trading down to Airbnb from hotels. “I think we’re a pretty resistant business,” he told investors this week.Garden products company ScottsMiracle-Gro noted that even when most home improvement categories fall in a recession, people keep buying paint and lawn care items. “I wouldn’t say we’re recession-proof,” said chief executive Jim Hagedorn, “but I do believe we’re recession-resistant.”Door-to-door protein shakes? “Based on the last 100 years of direct selling, it’s been very countercyclical,” said Herbalife chief John DeSimone. Alarm systems? “People tend to move less frequently, which means that they don’t tend to cancel their accounts,” said ADT chief financial officer Jeffrey Likosar. “In recessions, people tend to be more concerned about things like safety and security.”Dating websites? “We’ve seen increased engagement during times of anxiety and trouble,” said Match Group chief executive Sharmistha Dubey.Some companies will indeed perform well during a downturn, weathering the storm and picking up share from weaker competitors. Others will not. Founded as an Ohio hardware store back in 1868, the claimed resilience through business cycles of ScottsMiracle-Gro has weight. Climate change is a bigger threat to the lawn seed seller than a common or garden downturn.But other companies require more of a leap of faith. European Wax Center admits it has limited evidence for its recession resilience. Launched in 2004, the company was a much smaller business for the last severe recession in 2009. Airbnb does not even include that caveat. Chesky noted proudly that the company launched in August 2008 on the verge of the Great Recession. But it was minuscule back then. By January 2009 Chesky was celebrating weekly fees of less than $1,000. “This week so far we have done $734 in fees…” pic.twitter.com/wwgf0JvdZ2— Paul Graham (@paulg) September 2, 2020
Today Airbnb is turning over $7bn a year and has a $93bn market capitalisation. What Chesky has built is phenomenal, but its early weeks are not much of a guide to how it will weather a recession now. Credit to the rare boss who admits the uncertainty. “We have never been through truly a recession,” said Shake Shack chief executive Randy Garutti. The premium burger chain only started to grow seriously in 2008 and 2009. “Not going to make a claim on who we’re going to be in an unknown consumer spending environment.” His hope is that instead of customers trading up from McDonald’s, they might trade down from restaurants. Which is a thesis just as well founded but far less aggravating than most of the “recession-resistant” chuntering. More

Momentum is building for the European Central Bank to raise interest rates in July to fight soaring inflation, after dovish policymakers indicated they are ready to accept an end to almost eight years of negative borrowing costs.ECB chief economist Philip Lane and executive board member Fabio Panetta have signalled they are now more open to raising rates in the coming months, following calls from the governing council’s hawks to make the first rise in more than a decade sooner rather than later.The hawkish shift comes after eurozone inflation hit a record 7.5 per cent in April and brings the ECB closer in line with the Federal Reserve and the Bank of England, which both raised rates this week. However, the eurozone’s monetary policymakers still lag far behind their peers in the US and UK in the cycle of raising interest rates.The ECB has set borrowing costs below zero since June 2014, when it was still fighting Europe’s debt crisis. The deposit rate is now minus 0.5 per cent.On Friday the additional borrowing costs investors demand to hold Italian debt over that of Germany climbed above 2 percentage points for the first time since 2020, underscoring concerns that any ECB tightening of monetary policy will mainly effect riskier eurozone countries. The so-called “spread” between the two bond yields is a closely watched barometer of investor concerns about political and economic risks in the euro area. For many years, hawks have been greatly outnumbered by doves among rate-setters, but soaring inflation has changed the balance of power in recent months. Policymakers such as vice-president Luis de Guindos and executive board member Isabel Schnabel have said a series of rate rises could start by July. Many economists expect a 0.25 percentage point rise in the deposit rate to minus 0.25 per cent at the July meeting. Lane, seen as one of the rate-setting governing council’s more dovish members, said on Thursday: “It is clear that at some point we are going to be moving rates not just once, but over time in a sequence.” Asked if this could happen in July, he told an event at think-tank Bruegel that the timing of the ECB’s first rate rise “should not be seen as the most important issue”.“Once we do start moving . . . then the whole conversation will be: ‘OK, how much are you going to do and how quickly’,” he said, adding that “normalisation” would mean rates rising above zero, providing inflation remained on track to hit the central bank’s 2 per cent target.

The comments mark a further shift by Lane, who in February was still predicting most inflation would “fade away” within 12 to 18 months, playing down the urgency to shift policy. Panetta, the most dovish member of the ECB board, has continued to push back against the idea of raising rates at its meeting on July 21, telling La Stampa on Thursday that it should wait to see what second-quarter growth data showed later that month.However, he also said that given the rise in inflation expectations, the ECB could “gradually reduce the level of monetary accommodation.” He added: “Under current circumstances, negative rates and net asset purchases may no longer be necessary.”“This is probably the moment when doves cry and capitulate under too much pressure from the hawks,” said Carsten Brzeski, head of macro research at ING. “It’s fair to state that both Panetta’s and Lane’s attempts to prevent a rate hike in July were halfhearted, to say the least.”More centrist members of the ECB’s governing council, which includes eurozone national central bank chiefs as well as executive board members, have also shifted to supporting a July rate rise.Banque de France governor François Villeroy de Galhau said in a speech on Friday that he “wouldn’t preclude” a rate rise in the next few governing council meetings, adding: “Barring unforeseen new shocks, I would think it reasonable [for policy rates] to have entered positive territory by the end of this year.”Villeroy said the ECB needed to “carefully watch exchange rate developments” after the euro fell to a five-year low of $1.05 against the dollar, fuelling inflation by driving up import prices. “A euro that is too weak would go against our price stability objective,” he said.Katharina Utermöhl, an economist at Allianz, said: “Recent communication by several top officials suggests that the ECB in early May has pretty much already made up its mind regarding raising interest rates as soon as July.”Finland’s central bank boss Olli Rehn said on Thursday: “I think it would be justified to increase the deposit rate by 0.25 percentage points in July and to zero when autumn comes.” The ECB should press ahead with tightening policy despite the risk of eurozone recession next year, Rehn added.“There is no need to delay the normalisation of monetary policy,” Rehn told Helsingin Sanomat.Austria’s hawkish central bank chief Robert Holzmann on Thursday said the bank would “probably” raise rates at the June policy meeting. Russia’s invasion of Ukraine and China’s coronavirus lockdowns have raised fears that Europe’s economy could suffer an economic downturn this year. Some economists fear the ECB could tighten policy on the cusp of a recession. The last time the central bank raised rates in 2011 was just as the region’s debt crisis started. “Everything reminds me so much of 2011,” said Silvia Ardagna at Barclays.In early European trading on Friday, the gap between Italian and German bond yields reached the highest level since the depths of the coronavirus crisis in May 2020.Italy, which has a government debt load of more than 150 per cent of gross domestic product, has been a big beneficiary of the ECB’s bond-buying programmes and historically low interest rates.Additional reporting by Adam Samson in London More

Americans are stretching their budgets to buy new homes, hustling to strike deals quickly to avoid higher mortgage financing costs later, according to the latest industry data.Lenders and realtors said the willingness of buyers to devote more of their income to mortgage payments was providing support for housing prices just as rising rates were eroding affordability.Determined consumers are driving a “very, very aggressive, fast-moving spring market as we head into the homebuying season”, said Matt Vernon, head of retail lending at Bank of America.,He said expectations of higher rates are “pushing these buyers into the market”, and they are “getting more aggressive in their pursuit of home ownership from a timing perspective”.Mortgage rates have reached their highest levels in more than a decade, according to the latest Freddie Mac survey published on Thursday. The average for a 30-year fixed-rate mortgage hit 5.27 per cent, up from 2.96 per cent a year ago. Rising interest rates typically lead to a decrease in mortgage applications, but applications for new mortgages rose 4 per cent from the previous week, according to data released by the Mortgage Bankers Association on Wednesday.The MBA’s latest affordability index highlighted the determination of homebuyers. The average payment from new mortgage applications in March accounted for 42 per cent of an average American’s income, compared to 34 per cent a year before, according to an FT analysis of MBA and federal data.“If we can make it happen now, we want to make it happen now,” said Brittany Majors, a 37-year-old resident of New York City who said that she has been outbid 10 times on homes in the New Jersey suburbs in the last six months.Another sign of homebuying demand comes in the form of a rise in mortgage pre-approvals, which are the first step for homebuyers who need to take out a loan to finance their purchase. The process requires borrowers undergo an investigation into their finances in exchange for a letter they can show to sellers to prove they are qualified to buy a home.Increasingly, prospective buyers are seeking to be approved before they have identified a house to buy. Maxwell, a mortgage software provider that works with more than 300 US lenders, said pre-approvals without associated addresses hit 80 per cent of all applications in March, up from 50 to 60 per cent typically, in its network.“These are the months where all these folks should be going under contract, and you’re just not seeing it,” Maxwell chief executive John Paasonen said.Two-thirds of house shoppers in the market say they are willing to make an offer on a house immediately or within three days of viewing a home, according to a BofA study released last week. Additionally, more than 70 per cent of shoppers said they are willing to settle for homes in less-desirable neighbourhoods, with less space, to get a deal done, and 56 per cent are considering taking on a second job to earn extra income to achieve their home ownership goals, the report found.The national median single-family existing-home price was $368,200 in the first quarter, up 15.7 per cent on year, the National Association of Realtors reported this week. Majors, the prospective New Jersey homebuyer, said she has been in constant communication with her loan officer as rates have risen. “I ask him, ‘What’s my wriggle room? What’s my ceiling?’ and then we pick a number based off of that,” she said.So far, she increased her budget by $150,000 and knocked an extra bathroom off her list of requirements for a home in the suburbs.“I don’t know what to do because I know that financially it is probably not smart for me to go any further than I have gone,” she said. More

UK retail investors have rushed to withdraw money from investment funds this year, with net outflows in the first three months hitting £7.1bn, the highest level since the fourth quarter of 2018.The pace of the withdrawal accelerated rapidly over the three-month period, as concerns about inflation and rising interest rates were compounded by the impact of the Ukraine war, according to data released on Thursday by the Investment Association, the fund industry group.While the data cover a period that ended over a month ago, analysts expect investors to remain nervous. Inflationary fears have only grown in the light of the conflict, prompting both the US Federal Reserve and the Bank of England to raise official interest rates this week. Meanwhile, the fighting in Ukraine shows no sign of abating, causing human and economic havoc and disrupting global trade, especially in grain.“If inflation remains high, further rate rises look inevitable,” said Nicholas Hyett, analyst at investment broker Wealth Club. “Higher rates are bad news for property, stocks and shares and bonds, especially if paired with an economic downturn. But rising inflation means cash is no safe haven either. Investors, like rate setters, could be left looking for a least worst option.”According to the Investment Association, the March outflow of retail funds was net £3.4bn — the highest monthly figure since the UK’s first pandemic lockdown in March 2020, when £10bn was withdrawn. The March 2022 total topped February’s £2.5bn, which itself exceeded the £1.1bn recorded in January.The withdrawals were led by particularly large moves in fixed income funds, which saw outflows of £3.4bn in March. This took the quarterly figure to £6bn, the highest recorded quarterly fixed income outflow. Retail withdrawals from equity funds hit £3.8bn for the three months, including £1.2bn for March, with a net outflow of £505mn from European funds, reflecting the region’s exposure to the Ukraine conflict. That made the net outflow from equity funds the biggest for any quarter for almost three years.“Investors remained cautious in March in light of monetary tightening and Russia’s invasion of Ukraine,” said Chris Cummings, chief executive of the Investment Association. “Although Russia launched its invasion of Ukraine in February, the economic ramifications of the conflict became clearer in March.”

However, the outflows were partly offset by inflows into diversified funds, which are widely seen as safer havens, and into sustainable investment funds, with savers keen to act before the end of the UK tax year on April 5 to make use of Isa allowances. Cummings said managers saw “many investors rushing to use their Isa allowance and seeking potentially safer havens in diversified funds, with multi-asset strategies benefiting in particular”. Laith Khalaf, head of investment analysis at platform AJ Bell, predicted that the flight from bonds evidenced in the data would persist.“Bond investors will be wary of the continued pressure exerted by rising interest rates and quantitative tightening on bond prices, and will be thinking that by waiting it out, they can protect some capital and lock into a higher yield further down the road,” he said.He added: “At some point yields will become tempting enough to lure investors back into bonds, but until they are able to see past a spell of rising interest rates, bond fund sales are likely to remain under the cosh.”Emma Wall, head of investment analysis at platform Hargreaves Lansdown, said: “The market reaction to the devastation in eastern Europe was extreme volatility, and while many investors took the opportunity to take speculative bets, many chose to take their money off the table and turn to the perceived safe havens of cash and gold. “[Our] clients have also turned to multi-asset funds which prioritise capital preservation, outsourcing asset allocation in the face of market uncertainty.” More

Good morning. On Wednesday, stocks and bonds rose merrily after the Fed chair said that 75 basis point rate increases were not under active discussion by the Open Market Committee. This struck us as weird, given that chair Jay Powell was at pains to emphasise his focus on inflation and his willingness to be more aggressive if needed. He just didn’t sound dovish to us. Thursday, both stocks and bonds fell hard, more than reversing the prior day’s moves. For a moment we felt vindicated. Closer examination of the facts left us puzzled once again. Below, we try to make sense of the gyrations, to the degree possible. Email us: [email protected] and [email protected]. We’re taking Monday off. While we’re away, read the FT’s Asset Management newsletter, which comes out on Mondays. Very bad day follows very good dayHere’s a thumbnail sketch of what happened Thursday:The S&P 500 fell 3.5 per centThe Nasdaq fell 5 per centLong-dated Treasury yields rose — the 10-year by 14 basis points, to hit 3.06 per centShort-dated treasuries rose, but by less — the 2-year rose 8 basis points, to 2.71 per cent Inflation-protected Treasury yields rose — the 10-year by 13 basis points, to hit 0.184 per centCommodities were stable to up — oil, gold and copper all rose slightlyThe Vix volatility index hit 31 — high, but no higher than the peaks of recent weeks. Indeed it hit 36 on Monday.All of these moves, except for commodities, were meaty. This was a big across-the-board sell-off. Bonds provided no shelter from the carnage in stocks. What happened? Is there a coherent and compelling narrative here? There doesn’t have to be. When the trend is downward, volatility is up, and liquidity is patchy, markets reflect portfolio decisions made under duress more than they reflect stable economic realities. Still, amid the wreckage, the market might be telling us something useful. A few broad possibilities:Market participants realised Wednesday, en masse, that the Fed was much more hawkish than they had concluded initially. So short rates must rise, and with them, the possibility of a recession. Stocks do not like recessions. Market participants realised Wednesday, en masse, that the Fed was even more dovish than they concluded initially, so inflation was more likely to be higher for longer. So long rates must rise, commodities look more attractive. Stocks do not like runaway inflation, either.It’s not all about the Fed. Maybe investors are simply realising that the outlooks for the economy, corporate earnings and speculative appetite are not very good. Possibility #1 makes sense inasmuch as short rates fell hard as Powell spoke Wednesday, and then rose Thursday. And stocks got killed, which fits. But short rates didn’t rise that much, and long yields rose even more, an odd response to a recession.If the idea here is that, inspired by the ghost of Paul Volcker, Powell is going to push us into a recession, the yield curve should be flattening. But it’s steepening. Possibility #2 makes sense in that the difference between nominal and inflation-protected yields widened, increasing so-called “inflation break-evens”. Also the relative strength of commodities amid the chaos makes sense if more inflation is coming. Higher long rates fit higher inflation as well. But 10-year break-evens rose only a little, and only did that because nominal yields rose like mad. Five-year break-evens actually fell a smidgen. If inflation panic were worsening, I’d expect inflation-protected yields to fall, or at least not rise as much as they did Wednesday. Further, the two-year closely tracks expectations for the fed funds rate. Why did it rise if we’ve all decided Powell is a terrible wimp? If the pieces don’t quite fit for #1 and #2, we can turn happily to #3, which is flexible and all-purpose. Let us briefly recall the five most salient features of this investing environment:Strong consumer and corporate balance sheetsInflation, which is driven in some significant part by supply shocks from Covid and war, which central bank monetary tools cannot solveSlowing economic growth, as seen in everything from global PMIs to falling trucking ratesCentral banks that are tightening despite the supply issues and slowing growth — as personified Wednesday by the Bank of England, which yesterday both warned of recession and increased interest rates Very high stock valuations Only the first item is supportive of risk assets. The others are negative, and compound one another. Very bad days just happen when the backdrop is this poor.The last point on that list is likely becoming more important. We have not spoken very much about high valuations at Unhedged, because for many years most valuation measures have been sending bad signals. Stocks have looked expensive on traditional metrics for much of the last decade, but they have continued to rise. Referring to, say, Robert Shiller’s cyclically adjusted P/E ratio has been liable to get a person made fun of online. But now that the momentum is downward, and we are wondering how low stocks can go rather than how high they can reach, it may be time to think about valuations again. Here is Shiller’s ratio, which divides the price of the S&P 500 by 10-year average earnings:There has been a fair amount of talk from brokers recently about how recent price declines have made valuations more attractive. But this ignores cyclicality. Specifically, it ignores the fact (which we recently discussed here) that Covid-era margins have been extraordinarily high and seem likely to come down. Adjust for this, as the Shiller ratio does, and stock prices still look very high. This doesn’t tell you that they have to come down, but it removes a key psychological support in a stressful time.We are left with a final puzzle. After a stomach-churning few days, why isn’t the Vix higher? Garrett DeSimone, head of research at OptionMetrics, likes to say the Vix can be seen as the cost of insuring a stock portfolio against declines. If things are so bad, why isn’t the price of insurance rising more? DeSimone thinks it suggests that things might calm down in the coming days. But there is another possibility: that people don’t want insurance. They’d rather just sell.One good readAmerican nationalists have a thing about cat ladies. This makes perfect sense. More

Immediately after concluding his first monthly monetary policy meeting as chancellor and raising interest rates by a quarter point to 6.25 per cent, Gordon Brown dropped a bombshell. The first monetary policy meeting of the new Labour government with Bank of England governor Eddie George was also to be its last. From that moment on May 6 1997, the BoE would be independent to set interest rates through its newly created Monetary Policy Committee. Now, 25 years later, the independence of the central bank has not been seriously questioned under five prime ministers and six chancellors of the exchequer. “It’s amazing how [BoE] independence has become part of the [UK’s] institutional furniture,” Ed Balls, then Brown’s adviser and architect of the plan, told the FT.But with UK prices likely to rise at their fastest rates in over 40 years as sustained double-digit inflation becomes possible for the first time since the 1970s, former officials and economists say the independent BoE faces challenges that it has not encountered the past quarter of a century.

Labour chancellor Gordon Brown, left, with governor of the Bank of England Eddie George in 1998. © Gerry Penny/EPA

These include preventing inflation from spiralling out of control; avoiding distraction by fashionable ambitions, such as tackling climate change and inequality; ensuring transparent policy debate; and maintaining the legitimacy of its unelected officials to take the steps needed to defend the stability of the financial system.Lord King, governor between 2003 and 2013, insisted that the process of granting the central bank more autonomy from the early 1990s to full independence to set interest rates in 1997, was a success and enabled the BoE “to have an independent voice and one for which it was accountable”.The central bank’s post-independence history splits into two broad periods. The first decade was one of apparent triumph, with financial markets’ reassured that New Labour would not be profligate with the public’s money and generate inflation. Government borrowing costs declined, giving Brown more room to raise spending on social welfare and other priorities, while economic growth was strong and inflation stayed within 1 percentage point of the BoE’s inflation target. Such was the strength of the economy that Brown regularly boasted of not returning to “boom and bust”. On the 10th anniversary of independence in 2007, King said, “it is not, I believe, credible to dismiss [the good economic performance] solely as the result of luck”. However, the good times did not last. Economic growth per capita, which averaged 2.2 per cent a year in the UK over the first decade of BoE independence, has slumped to average just 0.4 per cent a year since. The economy suffered huge recessions following the global financial crisis in 2008-09 and the coronavirus crisis in 2020, which sandwiched years of grinding austerity as the UK faced up to being poorer than everyone hoped. Now, it faces a fourth shock following Russia’s invasion of Ukraine, which is pushing inflation higher and creating a cost of living crisis. Inflation has been much more volatile than in the first decade, briefly spiking above 5 per cent in 2008 and 2011 and threatening deflation after 2014 before climbing to 7 per cent in March this year. Price rises are now heading towards double-digit rates not seen since the oil price shocks of the 1970s.

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Mark Carney, governor between 2013 and 2020, said uncertainties over how far productivity growth had fallen — and whether this was permanent — made monetary policy much more difficult to manage.“The extent [productivity growth] went away was an open question . . . and then we had a prospective supply shock because of the Brexit decision that was relevant for monetary policy over our forecasting horizon,” he said. Over the 25 years as a whole, however, the inflation record is good, according to Jagjit Chadha, director of the National Institute of Economic and Social Research. “However you measure it, [MPC members have] hit their inflation target and this needs to be remembered amid all the criticisms — it tells us something about the value of having experts involved,” he said. King famously described the UK’s economic performance in the 10 years to 2003 as the “nice decade”, which he said was a warning that the good times could not last. “If we’d not had independence, there would still have been a global financial crisis,” he told the FT.

October 2008 — the global financial crash. © Ray Tang/Shutterstock

But the central bank did face serious criticism in the wake of the crisis. George Osborne, chancellor between 2010 and 2016, believed that the UK authorities’ failure to supervise its financial system adequately before 2007 required the BoE to have more power to regulate banks and the financial system, and a new governor, Carney, not tainted by the crash. With poor economic performance, accusations of flip-flopping guidance on interest rates and allegations of politicisation in the Scottish and Brexit referendums, scrutiny of the BoE has only increased in recent years. But it is Andrew Bailey, the governor since 2020, who faces the most difficult task of leading the central bank through a period of renewed inflation, according to former officials and external analysts. After the Lords’ economic affairs committee last year accused the BoE of having a “dangerous addiction” to quantitative easing and pumping up spending each time things looked difficult, the central bank needs to decide how quickly to withdraw stimulus to rein in inflation. “I think this is a big moment for [central banks] because they really have to demonstrate that they are determined to restore price stability,” said King. “It’s too late to argue that we’ve got a few months of high inflation and it will go away — it’s more a question of a few years,” the former governor said. Adam Posen, president of the Peterson Institute for International Economics and a former member of the MPC, believes the BoE has little choice but to raise interest rates even if it generates a recession at a time household incomes are squeezed by higher energy prices. “If real-income [declines] drove inflation cycles, we wouldn’t need monetary policy,” he said. “The whole reason you need a monetary policy-induced recession — probably necessary in the UK — is that the real-income effect doesn’t diminish inflation unless and until labour market conditions ease.”

Pedestrians walk past the Bank of England during the first Covid lockdown of March 2020. © Matt Dunham/AP

Paul Tucker, former deputy governor and author of Unelected Power, a book that questioned whether central banks have been given too broad a remit, thinks the BoE can address the challenge of higher inflation if it sticks to its core purpose. “Independence was a success, which wasn’t blown away by the global financial crisis,” he said. “But the BoE does now need to be focused on controlling inflation and stability of the wider banking system and that is it.” But there is concern that the BoE is shying away from holding the same open and public debate about difficult economic issues it did when it first become independent, possibly undermining public confidence that its independent officials will address tough choices in ways politicians would avoid.When inflation is heading towards double digits, Chadha said, “the MPC is far too quiet” about airing the big issues in public. Balls agreed that “over time, the [monetary policy] debate has become more muted” and that it would benefit the public to see the differences between experts aired in public. But as the independent central bank hits its 25-year anniversary, there are almost no calls for government to take back control and few think politicians would risk removing independence. “You can never take anything for granted,” said Carney. “But I think the structure of the MPC — enshrined in legislation, with explicit processes and personal accountability — greatly reduces that risk”. More